Lesson #1: What are Options? / Lesson #2: How options are priced / Lesson #3: Calls and Puts / Lesson #4: How options increase in value / Lesson #5: Time and Options / Lesson #6: Strike Price / Lesson #7: In, At and Out of the Money / Lesson #8: Option Risks / Lesson #9: Writing Options

In this section we would like to discuss another option trading strategy called Writing/Selling Options. In this particular strategy, you are serving as the retailer of the Call/Put and putting an option package into the market.

In order to sell options, you must either own the (Stock) underlying security (Covered Call/Put) or have the cash set aside in your brokerage account to purchase the stock (Naked Call/Put) in case you get called out or put to the underlying security.

Since a contract consists of a hundred options, in order to sell one contract, you must either own 100 shares of that particular stock or have the cash equivalent in your account.

The moment you decide to sell an option contract on your stocks, your broker will hold the stock (or equivalent amount in cash) in trust until the expiration date of the option contract to ensure that that your responsibilities under the contract can be fulfilled if called upon.

As the writer (seller) of the option contract, you receive the proceeds from the sale of the contract, minus brokerage fees.

If you are holding a particular stock for an extended period of time selling option contracts may be a way to make extra money on the stock while you are waiting for it to increase in value.

Writing (Selling) Put Options

When a person writes a put option that person assumes the responsibility to purchase XYZ stock at a predetermined strike price.

A person buying a put option, has the right, but not the obligation to force the writer of the option, to buy their XYZ stock at the predetermined strike price. If the Strike Price is $30, the buyer of the option hopes the price of the stock will go down. If XYZ stock drops to 26.00 the buyer has the right to purchase (If Naked) the XYZ stock at the 26.00 and force the writer of the option to buy the XYZ stock for 30.00. The put buyer will then pocket the difference. However, if the XYZ stock stays above 30.00 by expiration date the put writer gets to keep the premium that it received for writing the Put Option.

You would write (sell) a put option, if you expected that the stock would either increase in price or its price remains unchanged over the option contract period. In these two instances, the option would expire worthless, and as a put writer you would pocket the cash from the written sale of the option contract.

However, if the price of the stock did drop, you would be obligated to buy the stock at a price higher than its current market value. This would be partially offset by the revenues you received from the sale (Writing) of the option contract.

Writing (Selling) Call Options

When a person writes a call option that person assumes the responsibility to provide XYZ stock at a predetermined strike price.

A person buying a call option, has the right, but not the obligation to force the writer of the option, to sell XYZ stock to them at the predetermined strike price.

If the predetermined option Strike Price is $40, the buyer of the option hopes the price of the XYZ stock will go up. If XYZ stock increases  in value to 48.00 the call buyer has the right to purchase (Call out from the writer) the XYZ stock at the strike price of 40.00.

However, if the XYZ stock stays below the 40.00 strike price by the expiration date the call writer gets to keep the premium that they received for writing the call option.

The buyer of the option presumes that the stock will increase in value during the option period, to enable them the right to obtain the XYZ stock at the strike price, they can then turn around and sell it on the market for a profit.

You would write (sell) a call option, if you expect the stock price to either decrease in value or remain essentially unchanged and under the strike price. If either of these scenarios occur, the option would expire worthless and as the writer of the call option you would receive the proceeds from the sale of the options contract.

However, if the price of the stock rises, you would be obligated to sell the stock to the buyer of the option at the predetermined strike price . This loss would be partially offset by the revenues you received from the sale of the option contract, if you sold a Naked Call.