The Option Seller
The seller of an option gets paid up front but takes on an obligation. Compare the risks of a short call and a short put.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · Options Basics, lesson 5: “The Option Seller”
The seller of an option gets paid up front but takes on an obligation. Compare the risks of a short call and a short put.
Collect first, then take on the obligation
The option seller collects the premium up front. If the buyer exercises, the seller must deliver at the strike price.
Limited profit, asymmetric risk
The most a seller can make is the premium; a Short Call has unlimited losses if the stock soars, and the worst case for a Short Put is the stock falling to 0, a loss of strike − premium.
Sellers have to put up collateral
Brokers have to make sure you can deliver: selling a Put usually means setting aside “strike × 100” in cash, and selling a Call means owning the shares or posting margin. Uncovered “naked” selling carries the most risk.
Key takeaways
- The seller collects the premium, which is their maximum gain.
- If the buyer exercises, the seller must deliver: a short call has to sell the stock, a short put has to buy it.
- A short call's potential loss is unlimited; a short put's maximum loss = strike − premium (if the stock drops to 0).
- Sellers need collateral: cash set aside, shares held, or margin posted.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Short Call ($6 premium): drag the stock price at expiration to $160. How much do you lose per share? Does it keep growing further right?
- Short Call: as the stock moves anywhere below $100, what's your P&L per share?
- Switch to Short Put and drag the stock to $97: it's been exercised, so why do you still make $3 per share?
- Short Put: drag the stock to $20. How much do you lose per share? Compare with the maximum loss of $94 under “Max profit / loss”: at what stock price does it happen?
Quiz and explanations
- 1. Which position has an "unlimited" maximum loss?
- Answer: Short Call.After selling a call, the higher the stock goes, the more you lose.
- 2. You sell a put for a $3 premium, and at expiration the stock is above the strike. What's the result?
- Answer: You make $3.The buyer won't exercise, so you keep the whole premium.
- 3. You sell a $50-strike put for a $2 premium. At expiration the stock is $45. What's your P&L per share?
- Answer: −$3.You must buy a $45 stock for $50, losing $5; add the $2 you collected for a net loss of $3.
Terms in this lesson
- breakeven (Breakeven): The underlying price at expiration where you neither make nor lose money.
- call option (Call): The right to buy the underlying at the strike price; the higher the stock goes, the more it's worth.
- exercise (Exercise): When an option buyer uses their right, buying (call) or selling (put) the underlying at the strike price.
- intrinsic value (Intrinsic Value): What you'd get by exercising right now; for a call, max(stock price − strike, 0).
- margin (Margin): The deposit set aside when you open a position = position value ÷ leverage.
- premium (Premium): The price of an option, paid by the buyer to the seller; it's the most the buyer can lose.
- put option (Put): The right to sell the underlying at the strike price; the lower the stock goes, the more it's worth.
- strike price (Strike): The price written into an option contract at which you can buy or sell.
- option writer (Writer): The side that sells an option and collects the premium, taking on the obligation if the buyer exercises.