Option selling, also known as writing options, is a strategy where an investor sells a contract to another party giving them the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) on or before a specific date (expiration date). The seller, also known as the option writer, collects a premium for selling the option and is obligated to fulfill the contract if the buyer chooses to exercise their option.
There are two types of options: Call options and Put options. A Call option gives the buyer the right to buy the underlying asset at the strike price, while a Put option gives the buyer the right to sell the underlying asset at the strike price.
Option selling can be a risky strategy, as the option writer is exposed to unlimited potential losses if the underlying asset moves sharply in the opposite direction. However, it can also be a profitable strategy if the option writer correctly predicts that the underlying asset will not move much in value before the option expires.
One of the key benefits of option selling is that it allows investors to generate income from their portfolios without having to actually buy or sell the underlying asset. This can be useful for investors who want to maintain a long-term position in a stock or other asset, but want to earn some extra income in the short-term.
It’s important to note that option selling is not suitable for all investors, and it requires a thorough understanding of options market and the underlying asset. It is recommend that individual investors should work with a financial advisor or professional before engaging in option selling.