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Finance Glossary

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Writer

Definition:

We're a bunch of people at Shmoop who do this for a living. But in this case, "writer" refers to an option. That is, the person who sells an option is the writer of it and the term likely hails from an era in which option contracts weren't fully standardized so the person selling it literally had to write it, or at least a decent portion of it.

Example

I think GOOG is going to be flat to down from the $500 a share it sits at right now...for the next year. I want to take in some money and I'm willing to risk letting GOOG take off and go to $600 or $700—that is, I don't think it'll happen. So I write you a call option that gives you the right to buy a share of GOOG from me for $550 a share. The offer is good any time from now until one year from now (my option expires on the 3rd Friday of that month) and note that American style options are "any time"; European style options expire on a specified single date (i.e., much more vulnerable to short term market gyrations and manipulations so usually priced cheaper).

So what's the deal? Well, I am making a bet that GOOG doesn't trade above $600 between now and then (and I'm conveniently ignoring taxes). Why $600 and not $550? Well, the call option strikes at $550—that is, it's at that price I'm willing to sell you a share of GOOG. And you're paying me $50 for the privilege. So, all in, if you execute the call option I just wrote you, you'll pay me the $50 gate fee plus the $550 a share. And if the stock never gets appreciably above $600 so that you execute your call, then I made 100% on my "investment of risk" in writing you that call; that is, I keep the 50 bucks and buy a nice steak din, on you.

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