What Is an Option Writer?

What Is an Option Writer?

Let me explain what an option writer is. As the writer—sometimes called a grantor—you're the seller of an option, opening a position to collect a premium from the buyer. You can sell call or put options, and these can be covered or uncovered. An uncovered one is often called a naked option. For instance, if you own 100 shares of a stock, you could sell a call option on those shares to grab that premium; it's covered because you already own the underlying stock and agree to sell it at the strike price if needed. A covered put would mean you're short the shares and writing a put on them. But if it's uncovered, you're exposed to potentially huge losses if the market turns against you.

Understanding the Writer

You need to grasp how this works from the writer's side. As the option writer, you're giving the buyer the right to buy or sell an underlying security at a set price within a specific timeframe. In return, you get the premium upfront—that's your goal. But if it's uncovered, the risk is high if the option gains value for the buyer. Take a put writer: you're hoping the stock doesn't drop below the strike price, while the buyer hopes it does. If it falls way below, your losses mount as the buyer's profits do.

An option is uncovered when you lack an offsetting position. For a put writer agreeing to buy shares at the strike, if there's no short position to balance it, you're uncovered and at risk of having to buy those shares expensively.

You face big potential losses with uncovered options because you don't own the shares for calls or aren't short for puts. Adverse price moves can hurt badly. Imagine writing a call at $50 strike when the stock's at $45, then a buyout sends it to $65. If exercised, you buy at $65 to sell at $50, losing big—or you buy back the option at a $15 loss per share.

Your main aim as a writer is income from premiums when selling to open. Best case: contracts expire out-of-the-money, letting you keep it all. For calls, that's share price below strike; for puts, above. If it goes in-the-money, you might lose by buying back higher. Covered writing is conservative for income; naked is speculative with unlimited loss potential.

Call Writing

Let's look at call writing. Some traders use covered calls, especially on dividend stocks where prices fluctuate around ex-dividend dates.

With covered calls, outcomes are typically one of three: if worthless at expiration, you keep the premium. If in-the-money, you either let shares get called away at strike or buy back to close. Called away means selling your shares to the buyer at strike. Closing means buying the option back, with profit or loss as the premium difference.

For uncovered calls, it's similar but riskier. If in-the-money, you buy stock on the market to deliver or close the position. Loss is market price minus strike, minus premium received—potentially huge.

Put Writing

Now, for put writing. If you're short the underlying with matching shares sold short, it's covered. If in-the-money, the short offsets the put's loss.

In uncovered puts, if in-the-money, you buy shares at strike or close by buying a put. If buying shares, loss is strike minus market price, minus premium. If closing, it's buy premium minus received premium.

Premium Time Value

You should pay close attention to time value as a writer. Longer to expiration means higher time value—more chance it moves in-the-money, so buyers pay more premium.

Time decay works in your favor. An out-of-the-money option at $5 is all time value. Sell it, get $5; if it stays out, value drops to $0 at expiration, you keep it all.

Near expiry, value hinges on underlying vs. strike. If in-the-money by $3 but you got $5, you profit by buying back at $3—even if it expires in-the-money but less than premium.

Example of Writing a Call Option on a Stock

Consider this example with Apple (AAPL) at $210. You don't think it'll top $220 in two months, so you write a $220 call for $3.50, getting $350 (x100 shares). Keep it if under $220 at expiration.

You might own shares or buy 100 at $210 for covered. If it hits $230, uncovered you'd buy at $230 to sell at $220, losing $650 after premium. Covered, you deliver owned shares, gain $1,000 on shares plus $350 premium.

Downside for covered: if drops to $190, keep $350 but lose $2,000 on shares ($20 drop), netting $1,650 loss—better than $2,000 without the option sale.