Option Writer (Option Seller)

Definition

The term option writer refers to a trader that establishes a position and collects a premium from the buyer of the option. The most common options sold by a writer include puts and calls.

Explanation

Also referred to as an option seller, an option writer is a trader that collects a premium from the buyer, or holder, of the option. If the writer owns the underlying security, they are selling a covered option. Conversely, if the writer does not own the underlying, the option is said to be uncovered, or naked. The trader assumes more risk if they do not own the underlying asset and the position is termed to be speculative.

The most common reason for writing an option is to generate income from the premium collected for selling the contract. Profits are maximized when the option expires out-of-the-money; the writer keeps the premium and the holder of the option does not exercise their right to buy or sell the underlying. Generally, a trader can write a put or a call option:

  • Writing a Put Option: The writer of a put option collects a premium for providing the holder, or buyer, with the right, but not an obligation, to sell the underlying asset to the writer at the option's strike price. If the price of the security falls below the strike price of the option, the writer will be forced to purchase the security at the strike price, which is lower than market.
  • Writing a Call Option: The writer of a call option collects a premium for providing the holder, or buyer, with the right, but not an obligation, to buy the underlying asset from the writer at the option's strike price. If the writer does not own the underlying asset, and the price of the security rises above the strike price of the option, the writer will be forced to sell the security at the strike price, which is lower than market. If this is a naked call option, the writer will also be forced to purchase the security on the open market at a price that his higher than the strike price on the option.

Related Terms

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