In Options Trading, Who Bears the Counterparty Risk: The Buyer or the Seller?

When an option is exchange-traded, the clearing house eliminates counterparty risk for both parties. In an OTC option, both parties face risk.

The buyer risks the seller defaulting on the obligation to deliver the underlying asset or cash. The seller risks the buyer defaulting on the premium payment, although this is usually paid upfront.

The CCP is the ultimate guarantor in exchange-traded options.