In most textbooks, the most common point of view is that the investor ( you) holds the option. Therefore you (= holder) decide whether to exercise the option or not However, it is different when you are the writer (= seller) of an option. The arbitrage strategies for the call options require you to take a short position in the call option . You must be taught what happens and what to do, if you sell an option and it is exercised against you . These homework exercises will give you practice on the subject . The perspective of the option writer is unfamiliar and not obvious 1. Recall that an option writer has obligations but no rights (see Lecture 6) 2. This is an important fact and you must be taught the consequences 3. An option is exercised when it is in the money, i.e. the option holder makes a profit. 4. This means the option writer will suffer a loss when the option is exercised. . For a call option (both American and European), if the option is exercised, the option writer must deliver the stock and accept cash-K (= strike), even though the stock price is S 2 K and the option writer will suffer a loss. . For a put option (both American and European), if the option is exercised, the option writer must pay cash-K (= strike) and receive the stock, even though the stock price is S K and the option writer will suffer a loss. . There are also cash settled options. . Not all options involve delivery of stock. Options on stock indices are settled in cash. The option "strike" is measured in index points. To calculate the cash payment, there is a dollar multiplier M for every index point that the option is in the money. the option writer pays the holder cash of M(S - K) the option writer pays the holder cash of M(K - S) . For a cash settled call option (both American and European), if the option is exercised, . For a cash settled put option (both American and European), if the option is exercised