Options writing

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Options writing is a term used to describe any option trading strategy that involves selling options. An option writer sells options to potentially profit from the decline of extrinsic value on options, sometimes referred to as time value.

Option writing strategies include covered calls, naked calls and naked puts, bear call spreads, bull put spreads, ratio credit spreads, short strangles and short straddles. If the writer offsets (closes) an open position at a lower price than at which it was opened, the writer realizes a profit. The term option writing, however, does not refer to any actual writing of a contract.

Today, listed options are actually bought and sold in liquid markets. The reference to writing is a relic of the past, prior to trading in listed options, when option contracts were written between two parties. The opposite of option writing is option buying.

[edit] References

McMillan, Lawrence G. (2002). Options as a Strategic Investment, 4th ed., New York : New York Institute of Finance. ISBN 0-7352-0197-8.