In the case of a call option, it may be contractually agreed that the counterparty – the writer of the option – will physically deliver the underlying asset upon exercise. This must be provided even if the price of the underlying asset has risen far above the agreed price since the contract was concluded. The risk of loss here corresponds to the difference between the two prices. However, since the price of the underlying asset can theoretically rise indefinitely, physical delivery may become an extremely expensive service. – In the case of a put option, the writer must take delivery of the underlying at the originally agreed price, if this has been contractually agreed. If the market price of the underlying asset has fallen far below the agreed price, a loss equal to the difference between the two prices is incurred. In the extreme case, there is a loss in the amount of the originally agreed price. – If, on the other hand, an option provides for cash settlement, only a cash amount is payable. This corresponds to the difference between the strike price and the price of the underlying on the settlement date. The delivery in question therefore involves a higher risk than cash settlement. – See settlement, option, European, position, weak, commodity futures contract, forward contract, availability premium, replacement risk.
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