Writing an Option

Writing an option means selling an options contract to another party. The writer receives the option premium upfront and takes on the obligation to buy or sell the underlying asset if the buyer chooses to exercise. You become the counterparty to the buyer, which means their gain is your loss if the trade moves against you.

Think of writing an option like selling insurance: you collect the premium today and hope the policyholder never needs to file a claim.

Writing Calls vs. Writing Puts

Writing a call option obligates you to sell the underlying asset at the strike price if the buyer exercises. Writing a put option obligates you to buy the underlying asset at the strike price if the buyer exercises. The risk profile differs significantly between the two.

A written call exposes you to theoretically unlimited losses if the underlying asset rises sharply above the strike price. If you write a call at $100 and the stock rallies to $200, you must sell at $100 regardless. A written put limits your maximum loss to the strike price minus the premium received, because the underlying asset cannot fall below zero.

Covered vs. Naked Writing

Covered writing means you own the underlying asset when you write the call. If a holder exercises, you deliver shares you already own rather than buying them at market price. This is the covered call strategy, used widely by investors to generate income on existing stock positions.

Naked writing means you do not own the underlying when you write the option. This is speculative and carries unlimited risk on naked calls. FINRA requires specific account approval levels before permitting naked options writing, and margin requirements for uncovered positions are substantially higher than for covered positions.

Why Investors Write Options

Income generation is the primary motivation. Writing covered calls on existing stock positions produces premium income in flat or mildly bearish markets. If the stock stays below the strike, the option expires worthless and you keep both the stock and the premium. Writing cash-secured puts on stocks you want to own anyway generates income while waiting for a price decline to the entry level you want.

Professional options writers also use spread strategies that combine buying and selling options simultaneously to cap the maximum loss on a written position. A credit spread involves writing one option and buying another option with a different strike in the same expiry, collecting net premium while capping the potential loss to the difference between the two strikes.

The Greeks and How They Affect Writers

Time decay (theta) works in the writer's favor. Every day that passes without the option moving in-the-money erodes the time value component of the premium, reducing the option's price and making it cheaper for the writer to buy back if needed. Writers benefit most from selling options with relatively high implied volatility, as those options carry more premium, and then watching volatility normalize downward after the sale.

Gamma risk hurts writers when the underlying moves sharply. A large, fast move in the underlying can increase the option's delta rapidly, magnifying the potential loss for the writer far faster than theta decay can compensate for.

Sources:
https://www.cboe.com/education/
https://www.finra.org/investors/investing/investment-products/options
https://www.sec.gov/investor/pubs/options.htm