SIE (Securities Industry Essentials) Practice Exam

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In an options transaction, the premium must be paid by the _________.

option writer by settlement date
option buyer by execution date
option seller by trade date
option writer by trade date

The correct answer is: option writer by settlement date

The premium in an options transaction refers to the upfront cost paid by the buyer of the option to the seller. It is typically paid on the trade date, when the option contract is first agreed upon. This option premium serves as the compensation for the seller, who takes on the risk of fulfilling the terms of the contract. Therefore, it is important to note that the option writer, or seller, must receive the premium by the settlement date to ensure that they are fully compensated for taking on the risk. The other options are incorrect because they either refer to the buyer or execution date, which is when the option is exercised, rather than when the premium is paid, or they refer to the seller paying the premium on the trade date, which is not accurate.