How option writing (selling) is different from option buying?
Buyer of an option: The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/writer. Writer of an option: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him. Option writers are often holders of the underlying stocks and use the premium they receive to enhance their portfolio return. Option writers who do not hold the underlying stocks are referred to as naked’ holders. This can be risky since they receive a fixed premium but have an unlimited possible risk. They also run the risk of being exercised at any time. A naked’ writer must then immediately deal in the underlying market to cover his exposure either using options or futures. However, option strategies involving both buying and selling options are ideal for private investors as they can still give a limited loss while are the same time reducing the
