Colum

There is definitaly credit risk to the long as the short could always renege - that's the definition of credit risk right there. However, I'm not sure there is NO mkt or liquidity risk in options trading.

For mkt risk you still hold an asset that can fluctuate in price, really the issue would lie in whether you intend to sell it(or unwind the position) or let it expire. If you unwind the position you are certainly at the mercy of the mkt prices of the option available at that time. I'm not sure you can exclude mkt risk based on intent (Bonds still have mkt risk whether you plan on holding till maturity or just trying to capture a narrowing spread return)

For liquidity risk, I'm sure some options are easier to sell in the market than others. If you are planning to unwind your position you may not be able to find a counterparty in time and end up with an assignment you didn't want. (this may be why you reneged - bringing the credit risk to a reality - because your option was too illiquid to unwind!)


Just a couple of thoughts. Anyone agree?