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.