What is Option Selling?

When you sell an option, you will get the money from the sale up front, and your transaction will be profitable as long as the underlying stock remains out-of-the-money for the duration of the option’s life. You are not required to own the underlying stock to sell options, but you may be required to have a minimum balance in your trading account to cover the cost if the option is exercised. Remember, as a seller, you have an obligation to the holder if they choose to exercise the option.

If a stock moves down for the call seller, or up for the put seller, the option should lose value and will usually be able to be bought back for a profit. To close this kind of position, simply buy the option you originally sold. Otherwise, the only way to have this position close is if you are assigned or the option expires worthless.

When the option expires, the seller’s obligations end. If the option is never in-the-money, then the buyer will not exercise it, and the seller does nothing. The seller has just profited by the amount of the original option sale, which he received at the beginning of the trade.

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