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So, I understand that if I write a call option and someone decides to exercise it before it expires, I agree to sell them the stock for the listed price on the option.

I guess my confusion is, if I buy a call option from someone else and then sell it to another person before it expires and they then choose to exercise it: I do not have to sell the stock because I did not actually write the option.

In other words, the person at risk of selling the stock is the original writer of the option, and not any of the people who owned the option from the day it was written to exercise. Is this correct?

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    You're buying a right (to buy a stock at a given price before a given date). And selling that right. Once you sell, why would you think you have any remaining obligation, or right, for that matter? – JoeTaxpayer Oct 2 '14 at 21:05
  • The person at the risk is the one with an open short position, that may or may not be the original writer. Just as you got rid of your risk by selling the option, the original writer can close his position by buying the option back, then it is no longer his risk. – Victor123 Oct 14 '14 at 15:45
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You're correct. If you have no option position at execution then you carry no risk.

Your risk is only based on the net number of options you're holding at execution. This is handled by your broker or clearinghouse.

Pretend that you wrote 1000 options, (you're short the call) then you bought 1000 of the same option (bought to cover) ... you are now flat and have zero options exposure.

Pretend you bought 1000 options (you're long the calls) then you sold 1000 of them (liquidated your long) ... you are now flat and have zero options exposure.

  • Thanks, couldn't find the answer online and wanted to make sure my thinking was correct – Senju Oct 2 '14 at 19:30
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    Flat doesn't necessarily mean you haven't lost or gained money, remember. And whatever happens, you're out the money you paid in fees to push the options around. – keshlam Oct 3 '14 at 1:05
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    I read Matt's "flat" to mean no long holding any position. There may be a gain or loss at that point, but no position left in either direction. – JoeTaxpayer Oct 9 '14 at 1:27
  • Right, "flat" just means you're not holding any financial instruments, you're only holding cash. (Which begs the interesting question: since cash itself is a financial instrument, can one ever be truly flat? :) – dg99 Oct 10 '14 at 21:15
  • @dg99 he's flat the option ;) – Matthew Oct 10 '14 at 22:02
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If you sold bought a call option then as you stated sold it to someone else what you are doing is selling the call you bought. That leaves you with no position. This is the case if you are talking about the same strike, same expiration.

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