DEFINITION of 'Overwriting'

An options strategy that involves the sale of call or put options on stocks that are believed to be overpriced or underpriced, with the assumption that the options will not be exercised. Overwriting is a speculative strategy that some option writers may employ when they believe the underlying security is incorrectly valued, in order to collect a premium.


Also called overriding.

BREAKING DOWN 'Overwriting'

The writer of an option has an obligation to perform a certain action, while the holder of the option is not obligated to perform any action. Overwriting is a technique used by speculative option writers to attempt to profit from the premiums paid by option buyers for option contracts the writer hopes will simply expire without being exercised. Because the holder could exercise the option, this strategy is considered risky and should only be attempted by those with a comprehensive understanding of options and options strategies.

RELATED TERMS
  1. Allocation Notice

    An official notification from an options clearing firm to the ...
  2. Option

    A financial derivative that represents a contract sold by one ...
  3. Premium Income

    1. In investing, income that is earned through the sale of an ...
  4. Back Fee

    A payment made to the writer of a compound option in the case ...
  5. Covered Writer

    An options seller who owns the underlying security represented ...
  6. Pin Risk

    A risk that the writer of an options or futures contract faces ...
Related Articles
  1. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  2. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  3. Trading

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
  4. Trading

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  5. Trading

    Income Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  6. Trading

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  7. Trading

    Exploring The World Of Exotic Options

    Exotic options provide investors with new alternatives to manage their portfolio risks and speculate on various market opportunities. The pricing for such instruments is considerably complex, ...
  8. Trading

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
RELATED FAQS
  1. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >>
  2. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
  3. What is the difference between a banker's acceptance and a post-dated check?

    Learn more about speculation, stocks and options and how speculators use these financial instruments in an attempt to profit ... Read Answer >>
  4. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  5. What is the difference between "right" and "obligation" on a call option?

    Learn what a call option is, what determines a buyer and seller of an option, and what the difference between a right and ... Read Answer >>
  6. When is a put option considered to be "in the money"?

    Learn about put options, what they are, how these financial derivatives operate and when put options are considered to be ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center