SIE Understanding Products and Their Risks Question 9: Answer and Explanation

Question: 9

Which of the following is true of an option?

• A. The holder (buyer) is obligated to execute the option.
• B. The writer (seller) is obligated to fulfill the option if exercised.
• C. The issuer of the underlying security must grant permission for an option to be traded.
• D. The SEC guarantees performance of the option.

Correct Answer: B

Explanation:

B: The writer (or seller) is obligated to fulfill the option. Choice A is incorrect because the holder (or buyer) has no obligation to execute the option. Choice C is incorrect because the issuer is typically not involved in the initiation of an option. Choice D is incorrect because the Options Clearing Corporation, not the Securities Exchange Commission, guarantees all options traded on U.S. exchanges.