The inclusion of options in all types of investment strategies is rapidly growing in popularity among private investors. For beginners, one of the main questions that arises is why traders would wish to sell options rather than buy them. Selling of options confuses many investors because the obligations the risks and payments involved are different from the standard long option.
To understand why an investor would choose to sell the option, you must first understand what type of option it is that he or she sells, and what payments he or she is waiting for the price of the underlying asset moves in the desired direction.
Sale of option the investor will choose to sell a put option if her Outlook on the underlying security that it is going to grow and not put the buyer, whose Outlook will remain bearish. The option buyer pays a premium to the subscriber (seller) for the right to sell the stock at the agreed price in case the price heads lower. If the price is above the strike price, the buyer will not exercise the option because it would be more profitable to sell at a higher price in the market. Since the prize will be kept by the seller if the price closed above the agreed strike price, it is easy to understand why an investor will prefer to use this type of strategy. (For more information, see Introduction to writing.)
Let us consider a call option on Microsoft (msft) volume. The writer or seller on Tuesday, Jan18 67.50 put will get you a premium fee of $7.50 from the shackles of the buyer. If the price at the time the market closes higher than the strike price of $67.50 for 18 January 2018 to supply the buyer choose not to exercise his right to sell for $67.50 because it will be able to sell at a higher price in the market. Therefore, the maximum loss of the buyer payable in the amount of $7.50 that the gain of the seller. If the market price falls below the strike price, a put seller must buy the shares delivered to the buyer at a higher strike price from the put buyer to exercise his right to sell at $67.50.
Selling of a call option without having the underlying asset – the investor will prefer to sell a call option if his Outlook on a specific asset was that he was going to fall, unlike the bullish call buyer. The option buyer pays a premium to the writer for the right to buy the underlying asset at the agreed price in case the asset price is above the strike price. In this case the option seller will make to save premium if the price closed below the strike price. (Read more about this strategy, see naked call writing.)
The seller Russian market Jan18 70.00 call will receive a prize of $6.20 from the buyer call. If the market price at the time of closing falls below $70.00, buyer will not exercise the call option and the seller will win $6.20. If the Russian market the market price rises above $70.00, however, calling the seller undertakes to sell shares to the call buyer at the lower strike price, since it is likely that the call buyer will exercise his option to purchase shares at a price of $70.00.
Another reason why investors may sell the options below to include them in other kinds of option strategies. For example, if the investor wishes to sell his or her position in the stock when the price rises above a certain level, he or she can include what is called a covered call strategy. (To learn more, see come one, come all – covered calls.) Many advanced option strategies like an iron Condor, bull call spread, bull put spread, Iron butterfly, probably the investor is required to sell options.
For more information about options, see Our Basics, options Tutorial.