Options trading generated a record 48.5 million contracts per day in 2024, yet many investors are uncertain about when to sell them. Selling or writing options can generate steady income for experienced traders, but it requires understanding a key point that many novices get backward: You sell puts when you're optimistic about a stock's future and sell calls when you're pessimistic.

When you sell a put option, you're promising to buy a stock at a set price if it falls below that level—similar to how an insurance company promises to pay if your car gets damaged. In exchange, you collect a premium upfront. With call options, you're promising to sell a stock at a certain price, even if it rises much higher.

While selling options can create consistent income, they come with significant risks that demand careful forethought. An uncovered or "naked" call option—where you don't own the underlying stock—could theoretically lead to unlimited losses if the stock price soars. Understanding when and how to deploy these strategies is crucial for options traders—especially as they differ for calls and puts—and we guide you through what you need to know below.

Call vs. Put Options

Options contracts give traders different types of rights. Call options provide the right to buy an asset at a specifi𒁃c price within a set time frame. Put options give the opposite right—to sell an asset at a specific price within a given period.

Wh🦂en investors sell these con🎃tracts, they take the other side. Here are the key elements to know about each:

Selling puts: A put seller agrees to buy the asset if the put buyer wants to sell it at the agreed-upon price. This is why traders sell puts 🌌when they expect prices to rise (since they'd have to buy at a higher price than the market) and sell calls when they think prices will fall. It's the opposite view for those buying: Traders buy put options if they anticipate that the asset price will decline.

Selling calls: A call seller commits to sell the asset if the c🍰a🎀ll buyer wants to purchase it at the agreed-upon price. Traders purchase call options if they expect that the underlying asset price will rise; the one selling them expects the price to decline.

Options Terminology: Writing and Naked

In options markets, "writing" means selling an option contract. "Naked" writing means selling options without owning the underlying stock first. If the stock price shifts, you might have to buy it 🐼to make up your end of the contract; if you owned it already, this wouldn't be necessary, nor would you face the potential losses of doing so.

While naked options writing can generate steady income when markets behave as expected, it requires significant expertise and risk management. Professional traders typically only use naked strategies as part of a broader, diversified portfolio with strict position limits and hedging rules.

Selling Put Options

Investors sell naked puts when their outlook on the underlying security is that it's going to rise; the one buying it has a bearish outlook. The purchaser pays a premium to𒐪 the seller for the right to sell the shares at an agreed-upon price should the price head lower (otherwise they won't exercise the option).

Since the premium would be kept by the seller if the price closes above the agreed-upon strike price, you can see why an investor would choose to us🦋e this type of strategy. 

Example

Suppose you want to write an option on stock ABC. The Oct. 18 95.00 put would receive a $3.00 premium fee from a put buyer. If ABC's market price is higher than the strike price of $95.00 by Oct. 18, the put buyer won't exercise the right to sell at $95.00 since it can be sold at a higher price on the market.

Thus, the buyer's maximum loss is the premium, $3.00. If the market price falls below the strike price, the put seller must buy ABC shares from the put buyer at the higher strike price since the put buyer will exercise their right to sell at $95.00. Below is a chart of the profit and loss at different strike prices.

Selling Call Options

An investor would 澳洲幸运5开奖号码历史查询:sell a naked call option if their outlook on a specific asset was that it was going to fall, as opposed to the bullish outlook of a call buyer. The purchaser of a c🌳all option pays a premium to the writer for the right to buy the underlying at an agreed-upon price should the price of the asset be above the strike price. In this case, the option seller would get to keep the premium if the price close꧅d below the strike price.

Example

Suppose you wish to sell an option on stock XYZ for $70.00, believing its stock price is heading down. You'll receive a premium of $6.20 from the call buyer. If the market price of XYZ drops below $70.00, the buyer will not exercise the call option, and your payoff will be $6.20.

If XYZ's market price rises above $70.00, however, the call seller is obligated to sell XYZ shares to the call buyer at the lower strike price. Should the stock price continue upward, you are on the hook for 𝕴buying shares of that stock even as its price increases—this is the danger of writing a naked call.

Writing Covered Calls

A 澳洲幸运5开奖号码历史查询:covered call refers to selling call options while already owning at least the amount you'🐼ll need to cover if the buyer exercises the contract. To execute this strategy, if you hold a long position in a stock, you would sell call options on the same stock in an attempt to generate income.

Your long position is the "cover" since you can deliver the shares if the buyer of the call option exercises the contract. If you simultaneously buy stock and write call options against that stock position, it is known as a "澳洲幸运5开奖号码历史查询:buy-write" transaction.

Covered call strategies can help generate profits in flat markets, and, in some scenarios, they can ꧋provide higher returns with low🥃er risk than their underlying investments.

The Bottom Line

Selling options can generate steady income by collecting premiums, but💃 they require careful consideration of the risks involved and the market outlook. The cri♐tical principle is straightforward: Sell puts when bullish and calls when bearish, but always with a clear exit strategy or hedge in place.

While covered call writing offers a more conservative approach by using owned stock as protection, naked options writing demands significant expertise and careful 澳洲幸运5开奖号码历史查询:position sizing. Rather 🌠than viewing options selling as a stand-alone strategy, successful traders typically incorporate them within a broader set of strategies.