Options are financial derivatives that give options buyers the right and options sellers the obligation to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) within a specific period (expiration date). They derive their value from movements in the price of the underlying asset.
What are the rights and obligations of the buyer and seller?
The buyer of an options contract (i.e., the owner) has the right to exercise the contract, let it expire worthless, or sell it back into the market before expiration. The owner of the contract is likely to exercise the contract if it’s “in the money.” To get this right, the buyer pays a premium to the seller of the option contract.
The seller of an options contract has the obligation to execute the contract when the owner of the contract exercises it. When selling a contract you can buy back the contract in the market to remove the short position. Unlike the option holder who has a right to buy or sell, the seller has an obligation to sell (buy) once the buyer has exercised their right to buy (sell).