← BeginnerLesson 16 · 4:23
Why must a sold option be backed by shares or cash?
Summary
You can say what has to stand behind a sold option: 100 shares behind a sold call, and the strike times 100 in cash behind a sold put. You can work out that backing for any strike. You can show why a sold call with nothing behind it has no top to its loss, and why the backing doesn't remove the risk of owning the stock.
Key terms
- backing
- What stands behind a sold option: 100 shares behind a sold call, or the strike times 100 in cash behind a sold put.
- sold call backed by shares
- sold put backed by cash
- approval levels
- The tiers brokers sort accounts into, deciding which option trades, such as selling, you are allowed to place.
Check yourself
Answer each question to see why the right answer is right.
1. You sold a call with a strike of $100 for $345 and own no shares. On the last day XYZ is at $150. Where are you?
2. Same sold call, same $150 ending, but this time you owned 100 shares bought at $100. Where are you?
3. You want to sell one put with a strike of $45. How much cash must stand behind it?
4. You own 100 shares bought at $100 and sold the $100 call for $345. On the last day XYZ is at $70. Where are you?
5. You sold a $100 put for $341 with $10,000 set aside. XYZ finishes at $80. Does having the cash ready soften the loss?
Finished the video and the quiz? .