Learn · Options, from scratch
Buying versus writing
The most important lesson in this track. Buying an option and selling one are not two sides of a fair coin — the risks are shaped completely differently.
Every option contract has a buyer and a writer — the person who created and sold it. If you have read only one lesson in this track carefully, make it this one.
The buyer's position
- Pays the premium up front.
- Maximum loss: the premium. Known exactly, on day one.
- Maximum gain: large, and for a call, without a fixed ceiling.
- Has a right and may walk away.
The writer's position
- Receives the premium up front.
- Maximum gain: the premium. Known exactly, on day one.
- Maximum loss: large, and for a naked call, without a fixed ceiling.
- Has an obligation and may not walk away.
Fact
Writing a call without owning the shares has theoretically unlimited loss
If you have promised to sell shares at $110 and the price goes to $400, you must buy them at $400 to deliver them at $110. There is no level at which the loss stops, because there is no level at which a share price must stop rising. This is not a remote scenario — it is the standard risk of the position.
If you have promised to sell shares at $110 and the price goes to $400, you must buy them at $400 to deliver them at $110. There is no level at which the loss stops, because there is no level at which a share price must stop rising. This is not a remote scenario — it is the standard risk of the position.
Why anyone writes options anyway
Because most options expire worthless, so the writer usually keeps the premium. It feels like a steady income: small amounts collected repeatedly, most months uneventful.
Interpretation
“Usually profitable” and “safe” are different words
A strategy that wins small ninety times and loses enormously once can have a fine-looking record right up until the loss. The frequency of winning tells you nothing about the size of losing, and option writing separates those two things more sharply than almost anything else available to a retail investor.
A strategy that wins small ninety times and loses enormously once can have a fine-looking record right up until the loss. The frequency of winning tells you nothing about the size of losing, and option writing separates those two things more sharply than almost anything else available to a retail investor.
Covered and naked
| Position | You are | Worst case |
|---|---|---|
| Buy a call | Paying for the right to buy | Lose the premium |
| Buy a put | Paying for the right to sell | Lose the premium |
| Write a covered call | Obliged to sell shares you own | Miss the upside above the strike |
| Write a naked call | Obliged to sell shares you do not own | Unlimited |
“Covered” means you already hold what you have promised to deliver.
Margin, and being closed out
A broker will not let you write naked options without collateral, and will demand more if the position moves against you. If you cannot supply it, the broker closes the position — at whatever the price is then, not at a price you chose.
Interpretation
Forced closing is how the theoretical loss becomes a real one
The unlimited loss is not usually realised by a price going to infinity. It is realised by a margin call arriving at the worst moment and removing your ability to wait.
The unlimited loss is not usually realised by a price going to infinity. It is realised by a margin call arriving at the worst moment and removing your ability to wait.
There is a reason brokers make you pass extra checks before permitting naked option writing, and it is not paperwork for its own sake.
Education, not advice. These lessons explain how things work. They do not tell you what
to buy, and Wealth Signal does not publish recommendations. Full disclaimer.