Writing an Option
Candlefocus EditorThe fee, or premium, received when writing an option depends upon several factors including the current stock price, when the option expires, and the volatility of the underlying stock. It is important to note that writing an option involves risk and in some cases, traders could lose more than the premium paid if the option is exercised and the underlying stock falls below the strike price.
There are several benefits to writing an option. The first is that you receive an immediate fee, or premium, when you write the option. Additionally, if the option expires worthless, the option writer will keep the entire premium received. This is called time decay. Having the premium as an immediate reward is a great way to make a profit with little investment.
Another benefit to writing an option is the flexibility it offers. An option writer can choose which underlying asset to write options on, when the option expires, and which strike price to use. This is great for traders who want the freedom to pick and choose trades based on their individual strategies.
Despite some of the benefits to writing an option, it is important to remember that it is not risk-free. If the option is exercised, the option writer could be required to purchase the shares at a potentially unfavorable price. Additionally, if the underlying stock increases in price, the option writer could experience a big loss if the option is exercised at the strike price.
In conclusion, while writing an option can result in an immediate fee, or premium, it is important to consider the risks involved in order to make sure it is a right fit for an individual’s trading strategy. Experienced traders who are familiar with market dynamics and understand the risk will find writing an option to be quite profitable.