Writing Stock Options for Profit

Something you should keep in mind when options trading, is that there is always another trader on the other side of the trade, doing the exact opposite to what you are doing.

So when we buy (or take) an option, someone else has sold (or written) that option. We can choose to play either role in    any trade and as an options writer, instead of paying the premium for the option contract, we receive it! When you        write options, there are two ways to expose yourself to risk.

You can write Covered and Naked.

Your choice really depends on your comfort level with the risk associated with each and what results you are trying to achieve.

When you write Covered Calls, it means you actually own the stock you are writing options over and are looking to make some additional income. Even if the option holder exercised their right and you had to sell your shares, you would still keep the premium you received.

Writing Naked options means you are promising to buy, or sell shares you do not own.

An example would be if you wrote a naked put option. You are obligated to buy someones shares from them at a price higher than market value if you get exercised.

You are then stuck with shares you paid too much for, or you can sell them straight away at a lower price. Either way results in a loss.

If you decide to write naked puts, it should only ever be on shares you really want to own anyway (and can afford). You would benefit from doing so by collecting premium while you wait for the stock price to fall lower, resulting in more of a ‘wholesale’ purchase price.

The danger of course is in trying to pick the bottom, it may drop drastically more, resulting in a bigger loss overall.

The opposite applies if you wrote a naked call. If the price rose above your strike price, you would be obligated to buy the shares at market value and sell them to the option holder at a lower price.

As an options writer you need to be extremely cautious if you decide to write naked.

There are advanced options strategies however, that allow you to write options to collect premium with insurance to minimise your risk. This means you are almost covered, and can make money out of nothing.

To your success

Jules Dawson