buy credit risk

strike price 23, now stock 36, current market price of option 15, premium is 2 dollar. potential credit risk is 15 or 36-23-2=11?

if 11 is not correct, why it is wrong?

Are you long or short? American or European option?

BTW, European credit risk is potential until expiration (never “current”). Credit risk is borne by the long with American options. We fuckers can default if we wish ;).

Actually, I’ve read several contrasting viewpoints on this. For an American option is the credit risk always borne by the long, despite the “monyness”?

Another area where I’ve found contrasting statements between Schweser and CFAI.

I long the option, tell me why 11 is not correct? or why 15 /(1+r)^1 is not correct? r is interest rate, my option valid for 1 year, I’m asking the potential credit risk

premium is paid at beginning, so this isnt a risk anymore (you already paid the premium so there is no risk to the seller of not receiving it)

for options priced with Black Scholes , you don’t use risk free rate or any other calculation on top. Whatever B-S ( lol!) calculates is the current fair price , no need to divide anthing by risk free rate etc( you will get it wrong if you try to do that , it is NOT a flat price , it has delta , put-call-parity ,normal probability , everything complicated under the sun , plus the risk free rate already embedded in it ) So don’t argue .

Your potential credit risk is the fair price calculated by B-S , and not any calculation using strike, spot , cost of premium ( which never matters anyway , even upon expiration ) or risk free rate . So if they give you 15 , that’s it. If they give you 36 , 23 and 2 , then just grin and do it wrong , but I wouldn’t use the cost of the option , it never figures in the potential credit risk, it is a sunk cost , it is history , forget about it.

Sorry for the rant.

so buyer’s credit risk is the market price of the option, the seller of the option never has credit risk right? seller just receives premium in the beggining and goes home happy

Buyer’s potential credit risk is mkt value for all options, and current credit risk for american options.

European option have no current credit risk.

The market value of the american option is current risk only if the trader intends on exercising it. If the trader has intention of holding it till expiry, the risk is potential, not unlike the Euro option.