Option Writer

An option writer is the person who sells the option to the other party—for a price.

Example

An airline wants to hedge their fuel costs because prices are, uh, flying all over the place. So they go to a bank who is better positioned to take that risk—the airline wants the right to buy up to 100 million gallons of Jet L for $7 a gallon for the next 2 years.

Fuel today is $6 a gallon. The bank thinks there is very little risk that fuel goes above that $7 price in the next 2 years so they write an option to the airline for, say, 50 cents a gallon—that is, the airline now pays $50 million (100 million gallons times 50 cents) for the ability to not have to worry whether fuel prices spike.

If fuel prices never hit $7, the bank keeps all $50 million. Nice work if you can get it.