What is a 'Seller'

In general, a seller is an individual or entity who exchanges any good or service in return for payment.

In the options market, a seller is an entity who writes the option contract and collects the premium from the buyer in return for holding a short position in the option. The seller also takes the risk of having the short option exercised, which would be detrimental if the underlying security moves in the opposite of the desired direction.

The terms selling an option, shorting an option, and writing an option are equivalent.

BREAKING DOWN 'Seller'

Any investor can sell everything from equities and options to commodities and currencies, and much more. It also goes beyond formal marketplaces to include the selling of derivatives contracts, fine art, precious jewels, and many other over-the-counter assets.

Being the seller of an option is relatively risky when compared to other types of investment activity. For example, the writer of a call option is obligated to sell a specific number of shares of an underlying stock if the price moves above the strike price before the option expires. Theoretically, the risk to the options seller is unlimited as there is no limit to how high a stock can move.

Reduced Seller Risk

The simple sale of an options contract is called a naked put or naked call, depending on the option type. It means that the seller takes the full risk of adverse moves in the underlying security. If the buyer exercises the option, the seller must go into the open market to sell or buy the underlying security at the current market price.

However, with a covered call or covered put, the seller of the option already has a long or short position in the underlying asset. If the underlying asset is purchased or sold short at the same time as writing the covered options, the loss would be minimal. The seller of the option still gets to keep the premium received from the buyer.

There are many options strategies involving the sale of options. As an example, in a bull put spread, the investor sells a put option and at the same time buys a put option with a slightly lower strike price. The premium paid for the purchase of the lower strike option partially offsets the premium received from the sale of the higher strike option. While it reduces the risk to the investor, it also reduces the potential profit.

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RELATED FAQS
  1. 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 >>
  2. When does one sell a put option, and when does one sell a call option?

    An investor would sell a put option if her outlook on the underlying was bullish, and would sell a call option if her outlook ... Read Answer >>
  3. When is a put option considered to be 'in the money?'

    Learn about put options, how these financial derivatives work, and when put options are considered to be in the money related ... Read Answer >>
  4. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
  5. Is it more advantageous to purchase a call or put option?

    Learn the advantages of put and call options to choose the right side of the contract to meet your personal investment objectives. Read Answer >>
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