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Selling (Writing) Options: Collecting Premium and Taking On Obligation

Options and Derivatives • Beginner Investing • 8 min

What this lesson is about

Flip to the other side of the trade and the entire risk shape flips with it. Premium collected upfront, but a real obligation instead of a right.

2 parts · a quick check after each · then the quiz

Part 1 of 2

Every option you buy needs a seller. Being on the selling side flips the risk around. As a seller, you get the premium upfront. You have cash right away. But you also take on an obligation, not a right. If the buyer exercises, you must fulfill that obligation, regardless of how it affects you. For instance, a call seller who gets assigned must deliver 100 shares at the strike price. A put seller must buy 100 shares at the strike price. This happens no matter which way the market has moved.

Whether that obligation is manageable or risky depends on if the position is covered. A covered call means you sell a call option on stock you already own. If assigned, you just deliver shares you hold. Your upside is capped at the strike price, but there’s no extra risk beyond what you already have from owning the stock. A naked call means you sell a call without owning the shares. If the stock price rises sharply, you must buy shares at the new market price to deliver them at the lower strike. Since a stock's price can keep climbing, so can your potential loss.

What an option paysBuy or sell, call or put. The kink is at the strike.

Quick check

What does an option seller (writer) receive, and what do they take on in exchange?

Part 2 of 2

Insider Angle: A cash-secured put works the same way. You sell a put while holding enough cash to buy the shares if assigned. This turns it into a defined-risk trade. You’re on the hook for buying at the strike, but you have the money ready. Investors often use this strategy to collect premium income while waiting to see if they get assigned at a price they find acceptable. That’s why covered calls and cash-secured puts are the two strategies most brokers allow at the lowest options-approval tiers. Naked calls and other undefined-risk strategies need a higher approval level. Their worst-case scenarios behave very differently.
Try This: For a stock you own or would think about owning, find a call option about 5-10% above the current price, expiring in about a month. Calculate the premium you'd collect as a percentage of the stock's value if you sold a covered call at that strike. Would you be okay with having the shares called away at that price?

Quick check

What is a "covered call"?

Quiz

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