You Can Sell Options, Too

Option contracts are two-sided affairs. Each time a call or put option is bought, someone else must take the opposite side of that transaction and “write”, or sell, the contract.

Selling Options Produces Rewards

When an option is sold, it is paid for with cash. If you sell or “write” an option contract you will receive a cash deposit to your account. If the option expires out-of-the-money without being exercised, the cash received is yours to keep.

Selling options is a popular way to earn monthly profits, with a relatively high probability of success.

Stock Option Selling Carries Risk

It is time for a brief review of what we have covered so far. Recall that if you buy a call option, you have the right to buy the underlying security at the strike price. The option writer takes the opposite side of the transaction, however. Therefore, they have the obligation to deliver the underlying security at the strike price.

When buying a put, you receive the right to sell the underlying security at the strike price. By selling the put option, you will take on the obligation to purchase the underlying security at the strike price.

Whenever you sell an option you are taking on an obligation. By taking on an obligation, you are taking on risk.

Option Writing: Limited Rewards And Unlimited Risk

In return for taking on the obligation to buy or sell a security, the option writer receives a cash premium. That cash premium is the only compensation the option writer will ever receive. It is a limited, finite reward.

Despite the unlimited risk, limited reward aspect of option writing it is a popular form of trading. The reason option writing is popular is because once the option is sold it immediately generates a cash deposit to your account. As time passes and the option’s expiration date nears, the time value of that option contract ebbs reducing the value of that option.

Making Money Being An Option Writer

We do not recommend that you start selling options without fully understanding how to manage the risks inherent in doing so. Before you are ready to begin making money by selling option premium, you must first learn how to turn those unlimited risks into limited ones and then how to mange those risks so that they do not turn into liabilities that out pace your profits.

Option writing can be a lucrative endeavor.  The primary weakness of any option writing strategy, is the fact that your returns are limited to the premium collected.  If you hope to be profitable over the long term as an option writer, you must learn how to contain losses so that the incremental gains achieved are not decimated by a single adverse market turn.