Option writing, also called option selling, occurs when you create and sell an options contract to another trader. The seller (writer) collects a premium in exchange for taking on the obligation if the buyer decides to exercise the option to sell (in the case of a call) or buy (in the case of a put) the underlying asset at a predetermined price by a certain date. Option writers act like insurers: they earn upfront income but must fulfil the contract if the buyer exercises their right.

Who Is an Option Writer in the Stock Market?

An option writer (also called a grantor) is the person or institution that sells an option. By writing a call or put option, the writer receives a premium and agrees to fulfil the contract if exercised. A writer’s position can be covered (hedged with the underlying asset or cash) or uncovered (naked). Uncovered positions carry higher risk because the writer doesn’t own the asset or cash needed to meet potential obligations.

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Objective and Benefits of Call Writing

Call writing selling call options serves several purposes:

Income generation: Writers collect premiums, hoping the options expire worthless so they keep the entire premium.
Hedging: Investors who own a stock can use a covered call to earn extra income while limiting upside. If the stockdoesn’t rise above the strike price, they retain their shares and pocket the premium.
Entry or exit strategy: Sometimes traders write calls to exit a position at a desired price. If the option is exercised, they sell the stock at the strike price plus the premium.

Types of Option Writing

There are two main categories based on the type of option:

Call Writing: Selling call options gives the buyer the right, but not the obligation, to buy the underlying asset at a specified price. The writer expects the stock to stay flat or decline.
Put Writing: Selling put options gives the buyer the right, but not the obligation, to sell the underlying asset at a specified price. The writer expects the stock to remain stable or rise. Put writers collect a premium and may end up purchasing the stock at the strike price if the option is exercised.

Types of Call Writing Strategies

Within call writing, there are two key methods depending on whether the writer owns the underlying asset:

Covered Call Writing: The writer already holds the underlying stock. If exercised, they deliver their shares. This reduces risk because the shares are available to sell.
Uncovered or Naked Call Writing: The writer doesn’t own the underlying stock. If the option is exercised, they must buy the stock at market prices and sell it to the buyer at the strike price, risking unlimited losses if the stock price rises sharply.

Example of Writing a Call Option on a Stock

Suppose you own 100 shares of XYZ trading at ₹400. You sell (write) a call option with a strike price of ₹420 and receive a premium of ₹10 per share (₹1,000 total). Two outcomes are possible by expiry:

Price stays below ₹420: The option expires worthless. You keep your 100 shares and the ₹1,000 premium.
Price rises above ₹420: The option is exercised. You sell 100 shares at ₹420 each. You still keep the ₹1,000 premium, but you miss out on gains above ₹420.

Risks Involved in Option Writing

Unlimited loss potential: Uncovered call writing can lead to unlimited losses if the underlying asset price rises significantly. Uncovered put writing can result in large losses if the price falls sharply.
Margin requirements: Brokers require writers to hold margin to cover potential losses. Margin calls can occur if the market moves against the writer.
Opportunity cost: Covered call writers may have to sell shares at the strike price, missing out on further upside.
Market volatility: Rapid price movements can erode the premium and create losses before the option expires.

Difference Between Option Buyer and Option Writer

Aspect

Option Buyer

Option Writer

Right vs Obligation

Has the right, but not the obligation, to buy or sell the asset

Has the obligation to fulfil the contract if exercised

Profit Potential

Potentially unlimited gains (calls) or significant gains (puts)

Limited to the premium received

Loss Potential

Limited to the premium paid

Potentially high or unlimited (for uncovered positions)

Cost/Benefit

Pays a premium up front

Receives a premium up front

Ideal Market Outlook

Bullish (calls) or bearish (puts)

Neutral to slightly bearish (calls) or neutral to slightly bullish (puts)

Difference Between Call Writing and Put Writing

Aspect

Call Writing

Put Writing

Obligation

To sell the underlying asset if exercised

To buy the underlying asset if exercised

Market Outlook

Seller expects the price to stay flat or fall

Seller expects the price to stay flat or rise

Loss Potential

Unlimited if uncovered (price can rise indefinitely)

Substantial but limited to strike price less premium received

Use Case

Earn premium on shares you already own or want to exit at a fixed price

Earn premium while potentially buying shares at a discount

Conclusion

Option writing can be a powerful strategy for generating income or hedging positions. However, it carries significant risk if used without understanding the mechanics and potential downsides. Writers must manage their positions carefully, use covered strategies to limit exposure and remain aware of market conditions that could move prices sharply.

Frequently Asked Questions (FAQs)

What is option writing?

Option writing, also called option selling, is the process of creating and selling call or put options. The writer collects a premium and is obligated to buy or sell the underlying asset if the buyer exercises the option.

Why do people write options?

Writers collect premiums for income, hedge existing stock positions (covered calls), or enter stocks at specific prices (selling puts). It can add a stream of revenue to a portfolio but increases risk.

What is a covered call?

A covered call involves owning the underlying stock and selling a call option on those shares. The premium provides income while potentially capping upside if the stock price rises above the strike price.

How does naked call writing differ from covered call writing?

In naked call writing, you sell a call option without owning the underlying asset. If the option is exercised, you must buy the stock at market price to deliver it to the buyer, risking unlimited losses.

What is the payoff when writing a call option?

If the stock price remains at or below the strike price, the writer keeps the premium and the option expires worthless. If the stock rises above the strike, the writer’s profit is limited to the premium received minus any loss from selling the stock (if covered) or buying it in the market (if uncovered).

What are the risks of put writing?

Writing puts exposes you to the risk of buying the stock at the strike price if the market price falls below it. Losses can be significant if the stock price drops sharply, but they are limited to the difference between the strike price and zero minus the premium received.

Can you close an option writing position early?

Yes. Writers can buy back the option they sold (at the current market price) to close the position and limit losses or lock in profits before expiration.

How does margin work for option writing?

Brokers require writers to maintain a margin account to cover potential losses. If the market moves against the writer, the broker may issue a margin call requiring additional funds to keep the position open.

Is option writing suitable for beginners?

Because of the potential for large losses, naked option writing is risky for beginners. Covered calls and cash‑secured puts are less risky but still require a solid understanding of options.

What is the difference between writing a call and buying a call?

Writing a call obligates you to sell the underlying asset if exercised, while buying a call gives you the right—but not the obligation—to purchase the asset. Writers hope the option expires worthless; buyers hope the asset price exceeds the strike price so they can profit.

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