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What does it mean to sell an option?
Selling an option means you are the one being paid, and the one who owes something. Here is what you collect, what you promise, and how it ends.
The short answer
When you sell an option, you take the other side of the buyer's trade. The buyer pays you a premium today. In return, you promise to buy shares (if you sold a Put option) or sell shares (if you sold a Call option) at the Strike price, if the buyer chooses to use the contract.
The premium is yours to keep no matter what happens. The promise is yours to keep too.
Buyer and seller, side by side
| The buyer | The seller (you) | |
|---|---|---|
| Pays or gets paid? | Pays the premium | Gets the premium |
| Has a right or a duty? | A right (may use it) | A duty (must deliver if they use it) |
| Best case | A big move in their favour | The option expires worthless; premium kept |
| Worst case | Loses the premium | Owning or handing over 100 shares at a bad price |
| Time passing | Hurts them | Helps you |
Every option has one of each. Your premium is their cost. Their gain is your obligation.
What you're paid, and what you owe
What you're paid: the premium, in cash, the day the trade fills. One contract covers 100 shares, so a premium of $1.00 is $100.
What you owe: depends on the type.
- Sell a put, and you owe a purchase. If the buyer exercises, you buy 100 shares at the strike.
- Sell a call, and you owe a sale. If the buyer exercises, you sell 100 shares at the strike.
That is called Assignment. It is the promise being called in.
A small example (an illustration, not a trade idea)
A made-up stock, XYZ, trades at $50. You sell one 30-day $45 put for $1.00. You collect $100. Your broker sets aside $4,500 in case you have to buy the shares.
| XYZ at expiry | What happens | Result |
|---|---|---|
| $55 | Put expires; nothing to do | +$100 |
| $50 | Put expires | +$100 |
| $45 | Put usually expires | +$100 |
| $40 | Assigned: you buy 100 at $45, now worth $40 | −$500 + $100 = −$400 |
| $30 | Assigned at $45, worth $30 | −$1,500 + $100 = −$1,400 |
The premium is the most you can make. The loss can be most of the strike price. That is a math example, not a promise.
Two ways to sell with the risk covered
Beginners sell options in two forms, and both are "covered" by something you already have:
- A covered call. You own 100 shares and sell a call on them. If assigned, you hand over shares you already own.
- A cash-secured put. You hold the cash to buy 100 shares and sell a put. If assigned, you buy with cash you already set aside.
Done in turn, those two make up the wheel strategy. Selling a call on shares you don't own, or a put with no cash behind it, is "naked" selling, and most brokers won't allow it at a beginner approval level.
How a sold option ends
There are three endings:
- It expires worthless. The stock stayed on your side of the strike. You keep the premium and the promise ends.
- You buy it back. You close the trade early, paying whatever the option is worth now. See what buy to close means.
- You're assigned. The buyer uses the contract. Shares move in or out of your account at the strike.
You don't get to choose the third one. The buyer does.
Questions
Do I get the premium even if I'm assigned?
Yes. The premium is paid when the trade fills and never comes back. If you're assigned, you keep it and it lowers your net cost on the shares (for a put) or adds to your sale price (for a call).
Can I sell an option without owning the stock?
You can sell a put with cash set aside (cash-secured) at most brokers. Selling a call without the shares is a naked call, with unlimited risk, and usually needs a higher approval level.
Is selling an option the same as shorting a stock?
No. Shorting a stock bets on it falling with no end date. Selling a put is a promise to buy at a set price by a set date, and you're paid for it. Selling a covered call is a promise to sell shares you own.
Who am I selling the option to?
Usually a market maker or another trader who wants that right. You never deal with them directly; the exchange matches the orders. See who buys the options I sell.
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