What is option writing – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/portfolio/commodity-analysis/what-is-option-writing/article37844951.ece?homepage=true

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Short selling in the options segment is termed as ‘option writing’. That is writing an option means either you sell a call option or sell a put option. How does it differ from buying a call/put option?

Another major risk involved while selling an option is that the loss incurred could be unlimited. This is just opposite to that of buying an option where the loss is limited to extent of the premium paid. For example, assume that Nifty Bank Call option premium is ₹120 for a strike price of 38,000. A trader selling a call option will receive ₹3,000 (₹120*25 – the lot size) from the buyer. Say at the time of expiry, the Nifty Bank moves up to 38,500 and the premium moves up to ₹500. The seller of the option will have to buy back the option by paying ₹12,500. Thereby the option writer will incur a net loss of ₹9,500 (₹12,500 minus ₹3000 – the option premium earned) in this transaction. The more the Nifty Bank index moves up above the strike price, the wider the loss will be.

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