Arbitrage
Why does the dealer who sells call option also (often) simultaenously buy the stock?
And can i infer through this that a dealer selling put option often sells the stock?
Arbitrage
Why does the dealer who sells call option also (often) simultaenously buy the stock?
And can i infer through this that a dealer selling put option often sells the stock?
This is called a covered call and is used to manage the risk of writing call options as you know what your maximum loss at the outset whereas when it is uncovered the potential loss is unknown.
I am not aware that a writer of a put option shoritng the stock is common practice. What is fairly common is a protective put which is the stock is owned and a put option is held. This sitution means that the holder of the stock can be sure of the profit or loss they will receive as they know the price they bought it for and the strike price tells them the price they can sell for.
Hope this is of help