← BeginnerLesson 15 · 5:08
What happens when you sell an option?
Summary
You can read the seller's side of an option: paid up front, and bound to deliver if the buyer asks. You can work out a sold call's and a sold put's best case, break-even and losses, and see why the loss can be far bigger than the cash taken in. You know time works for the seller, and that a move against you can undo it quickly.
Key terms
- selling an option
- Starting a trade by taking the premium up front, in return for the duty to deliver if the buyer asks.
- seller's duty
- capped profit
- time working for the seller
Check yourself
Answer each question to see why the right answer is right.
1. When you start a trade by selling an option, what do you get and what do you take on?
2. You sold a call with a strike of $100 for $345. On the last day XYZ is at $120. Where are you?
3. You sold a put with a strike of $100 for $341. What is your break-even?
4. Why is there no limit to what a sold call with nothing behind it can lose?
5. You sold the $100 call for $345 and XYZ stands still at $100. With 15 days left, where does the model put you?
Finished the video and the quiz? .