Writing An Option

Filed Under » , , ,
Dictionary Says

Definition of 'Writing An Option'

The expression "writing an option" refers to the act of selling an option. An option is the right, but not the obligation, to buy or sell a particular trading instrument at a specified price, on or before its expiration.

When someone writes (or "sells") an option, he or she must deliver to the buyer a specified number of shares if the option is excercised The writer has an obligation to perform a duty while the buyer has the option to take action. There are two general types of option writing: covered and naked.

Investopedia Says

Investopedia explains 'Writing An Option'

In a covered call, the option writer already owns the underlying trading instrument and wishes to make extra money from the position. He or she can write (or sell) an option based on the expectation that the underlying's price will move in a particular way. The buyer pays the writer a premium in exchange for writing the option.

If the option trades at a value that benefits the buyer, the seller is obligated to hand over the shares. If the option expires at a value that does not benefit the buyer, the seller retains the original shares. If the option writer does not own the underlying instrument, it is said to be a "naked" option. This is more risky than writing a covered call since the writer is still obligated to produce the specified number of shares of the particular contract (without already owning them).

Directory (Option Strategy)

  1.

    Alligator Spread

  2. Atlantic Spread

  3. Back Fee

  4. Backspread

  5. Bailard, Biehl And Kaiser Five-Way Model

  6. Bear Call Spread

  7. Bear Put Spread

  8. Bear Spread

  9. Bear Straddle

  10. Box Spread

  11. Bull Call Spread

  12. Bull Put Spread

  13. Bull Spread

  14. Bullet Trade

  15. Butterfly Spread

  16. Buy A Spread

  17. Calendar Spread

  18. Call Ratio Backspread

  19. Collar

  20. Collar Agreement

  21. Condor Spread

  22. Contingent Order

  23. Conversion Arbitrage

  24. Covered Call

  25. Covered Combination

  26. Covered Straddle

  27. Credit Spread

  28. Death Put

  29. Debit Spread

  30. Delta Hedging

  31. Delta Neutral

  32. Delta Spread

  33. Diagonal Spread

  34. Dividend Arbitrage

  35. Double One-Touch Option

  36. Fence (Options)

  37. Fiduciary Call

  38. Fixed Dollar Value Collar

  39. FMAN

  40. Forex Hedge

  41. Forex Option & Currency Trading Options

  42. Form 6781: Gains And Losses From Section ...

  43. Front Fee

  44. Gut Spread

  45. Heston Model

  46. Horizontal Spread

  47. Implied Volatility - IV

  48. Interest Rate Collar

  49. Iron Butterfly

  50. Iron Condor

  51. Leg

  52. Leg Out

  53. Long Jelly Roll

  54. Long Leg

  55. Long Put

  56. Long Straddle

  57. Long-Term Equity Anticipation Securities ...

  58. Married Put

  59. Modidor

  60. Multi Index Option

  61. Multi-Leg Options Order

  62. Naked Call

  63. Naked Option

  64. Naked Position

  65. Naked Put

  66. Negative Butterfly

  67. Net Option Premium

  68. Neutral

  69. Option Premium

  70. Outright Option

  71. Overwrite

  72. Overwriting

  73. Positive Butterfly

  74. Protective Put

  75. Put Calendar

  76. Put On A Call

  77. Put On A Put

  78. Put Ratio Backspread

  79. Put To Seller

  80. Ratio Call Write

  81. Ratio Spread

  82. Reverse Calendar Spread

  83. Reverse Conversion

  84. Risk Reversal

  85. Roll Down

  86. Roll Forward

  87. Roll Up

  88. Seagull Option

  89. Sell To Open

  90. Series 4

  91. Short Leg

  92. Short Straddle

  93. Straddle

  94. Strangle

  95. Swing Option

  96. Synthetic Dividend

  97. Variable Ratio Write

  98. VIX Option

  99. Writing An Option

  100. Zero Cost Collar

  101. Zomma

Articles Of Interest

  1.

    Do Option Sellers Have a Trading Edge?

    Take a look at a study that discovered that three out of every four options expired worthless.

  2. The Ins And Outs Of Selling Options

    Selling options can seem intimidating but with these tips, you can enter the market with confidence.

  3. When does one sell a put option, and when does one sell a call option?

    The incorporation of options into all types of investment strategies has quickly grown in popularity among individual investors. For beginner traders, one of the main questions that arises is ...

  4. Basic Investment Objectives

    You might know about different asset types, but do you know how each type contributes to a particular goal?

  5. Exploring The Current Account In The Balance Of Payments

    Learn how a country's current account balance reflects the country's economic health.

  6. Understanding And Playing The Dow Jones Industrial Average

    Learn strategies for investing in this price-weighted index and how to interpret its movements.

  7. Writing A Covered Call

    Writing an option is the process of selling to another investor the right, but not the obligation, to buy or sell a stock at a given price in the near future. It can also be referred to as shorting ...

  8. Arbitrage Squeezes Profit From Market Inefficiency

    This influential strategy capitalizes on the relationship between price and liquidity.

  9. The Butterfly Spread

    A butterfly spread is a neutral options strategy with both limited risk and limited profit potential. The strategy involves four options contracts with the same expiration month but with three ...

  10. Making It Big On Wall Street

    Read about some of the most glamorous Wall Street jobs and what it takes to land one.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Xenocurrency

    A currency that trades in markets outside of its domestic borders.

  2. Wanton Disregard

    A standard of severe negligence. Wanton disregard is a very serious accusation that indicates that a person behaved extremely recklessly.

  3. Ultra ETF

    A class of exchange-traded funds (ETF) that employs leverage in an effort to achieve double the return of a set benchmark.

  4. Toehold Purchase

    A purchase of less than 5% of a target company's outstanding stockmade by an acquiring company. A toehold purchase of just under 5%, while not a significant stake in a firm, allows the shareholders a "toe-holds" grip on the company and its decision making.

  5. Samurai Bond

    A yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.

  6. Chartalism

    A non-mainstream theory of money that emphasizes the impact of government policies and activities on the value of money.
Trading Center