Traded options: LIFFE: Grant of option: premium received
As well as buying an option a taxpayer can also grant, or write, an option and receive a premium. In general there is more risk involved in writing options than buying them.
If the taxpayer writes an equity call option, see CG12301, they are agreeing to sell the underlying shares at a fixed price. If the option is exercised the taxpayer will have to deliver the underlying shares.
Usually a private investor will be required to own a sufficient number of the underlying shares to satisfy the contract before they are allowed to write call options. The investor will then be described as `covered’ as distinct from `bare’.
A taxpayer who writes a put option may be required to buy the underlying shares at an uneconomic price. For example, investors who wrote put options immediately before the sharp fall in stock market prices in October 2008 are likely to have suffered a significant loss.