What does the term 'option writer' refer to?

The term 'option writer' refers to the party who sells the option. In the context of options trading, the writer is the individual or entity that creates and offers the option contract to the buyer. By selling the option, the writer receives a premium from the buyer, which is the cost of acquiring the option.

The option writer is obligated to fulfill the terms of the contract if the buyer decides to exercise the option, meaning that the writer must either sell the underlying asset at the predetermined strike price (in the case of a call option) or buy the underlying asset at that price (in the case of a put option). This obligation to execute the terms of the contract highlights the risk taken on by the option writer, as their potential loss can be significant if the market moves unfavorably.

Understanding this role is crucial for comprehending the dynamics of options trading, as the relationship between the buyer and writer impacts pricing and market liquidity. The other options describe different roles within the options market, none of which accurately reflect the definition of an option writer.