General Securities Representative (Series 7) Practice Exam

In trading index options, who is responsible for paying the seller the premium?

1. Owner

2. Buyer

3. Broker

4. Exchange

The correct answer is: Buyer

In the context of index options trading, the buyer of the option is responsible for paying the seller (or writer) the premium. This payment reflects the buyer's right to exercise the option, while the seller receives the premium as compensation for taking on the obligation associated with the contract. The buyer initiates the transaction by purchasing the option, which entails paying the premium upfront. This sets the stage for the buyer to benefit from possible movements in the underlying index without having to actually own the index itself. If the option is exercised, the buyer gains the advantage of the market position they have secured through the purchase of the option, all while the seller retains the premium regardless of the outcome. The other options, such as the owner, broker, and exchange, do not represent the party responsible for premium payment within this specific transaction. The owner does not necessarily equate with the buyer in this context, as there are various participants in the market. Brokers facilitate the transactions and provide access to the market but are not the parties involved in the exchange of premium between the buyer and seller. The exchange, while it provides the platform for trading and oversees the market's operation, does not directly participate in the payment of premiums within individual option trades.