When I write options I receive premium amount. What is this? Why do I receive this & what are the restrictions on this?
Whenever you buy something you need to pay to the seller, similarly whenever you sell something you will receive payment from buyer.
The same logic applies in options also. When you are buying option you are paying premium amount to seller. Writing option means selling option without holding, since you are selling a security you will receive payment from buyer that is called as premium in option terms.
Due to high risk in writing option there is SPAN margin requirement.
Restriction is brokers generally not allow you to trade with the premium received by option writing.
Its very simple. Seller charges premium for the risk they take. This is what happens when you (buyer) pay a premium to a insurer (seller) towards your life insurance policy.
Think about a typical insurance company. They are in the business of insuring you against any potential loss.
For example, when you buy a pure risk life insurance cover from LIC you are basically entering into an agreement with LIC, wherein LIC agrees to pay a certain amount if (god forbid) something happens to you.
Now in order to get into this insurance cover you pay a fee to LIC which is known to us an Insurance Premium. In an agreement of this sort, LIC is called an Insurance writer and you are the buyer. In almost all cases the buyer pays the writer a fee (premium) and in case there is a claim by buyer then the writer is obligated to pay.
Likewise in the Options market when you write options, you are kind of stepping into LIC's shoe. You are basically telling the Option buyer..."Look, give me the premium money and in case something happens I will cover your risk, if nothing happens, the I keep the insurance money".
As long as you have sufficient margins in your account and ample liquidity in market there are no restrictions that I can think of.
Hope this helps.
When you write an option, you agree to the option buyer that you will supply the underlying at the strike price. (The buyer of the option can ask for the underlying during the life cycle of the option or on expiry day depending European or American type option.) For giving this right to buy the underlying at the specified rate, you demand a premium from the option buyer, this is the option premium.
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