If an options contract is exercised, which of the following statements is true?

• A. The option premium is refunded to the holder.
• B. No transaction occurs and both parties are released from their obligations.
• C. The holder of the option must buy or sell the underlying asset as specified in the contract.
• D. The option contract is automatically renewed for another term.

Answer: (C)

Verified step by step guidance

1. Understand the concept of an options contract: An options contract gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) before or at a certain expiration date.
2. Clarify the role of the option holder: If the holder exercises the option, they are choosing to act on the right provided by the contract. This means they must buy (in the case of a call option) or sell (in the case of a put option) the underlying asset as specified in the contract.
3. Evaluate the statement about the option premium: The option premium is the cost paid by the holder to acquire the option. This premium is not refunded upon exercising the option; it is the cost of having the right to exercise the option.
4. Analyze the statement about transaction occurrence: If the option is exercised, a transaction does occur. The holder and the writer of the option fulfill their obligations as specified in the contract. Both parties are not released from their obligations until the transaction is completed.
5. Review the statement about contract renewal: Options contracts are not automatically renewed for another term. Once the expiration date passes or the option is exercised, the contract ends.