SIE (Securities Industry Essentials) Practice Exam 2025 - Free SIE Practice Questions and Study Guide

In an options transaction, the premium is the price that the buyer pays to the seller (or writer) for the right to buy or sell an underlying asset at a specified price within a certain timeframe. The premium is a crucial component of the options contract because it compensates the option writer for the risk they undertake by selling the option.

The correct answer indicates that the premium must be paid by the option writer by the settlement date. This reflects the settlement process, where the exchange of funds for the option takes place. The option writer receives the premium once the transaction is finalized, which usually aligns with the settlement date, allowing them to adequately account for the transaction in their records.

In contrast, the other options do not accurately describe the dynamics of the premium payment in an options transaction. The option buyer does indeed pay the premium, but this occurs at the point of execution (actual transaction initiation) rather than by the execution date. The option seller is typically not responsible for any premium payment as they receive the premium, rather than paying it. Also, stating that the writer pays the premium by trade date contradicts the fundamental principle of options, which is that the writer receives the premium at the trade date or execution date, not pays it.

Thus,