The option premium compensates the seller for the expected loss should the option be exercised by the buyer.

Question

Quizplus · Accepted Answer

The option premium is the price paid by the buyer to the seller for the right to buy or sell an underlying asset at a specified price and time. The premium compensates the seller for the risk they take on by selling the option and provides protection against expected losses if the option is exercised. Therefore, the statement is true.

The Option Premium Compensates the Seller for the Expected Loss