Writing an Option in 2025: Costs, Benefits, and Real Examples

What Does Writing an Option Mean?

Writing an option is the process of selling an options contract, where the writer collects a premium in exchange for granting the buyer the right to buy or sell shares at a predetermined price on or before a specific expiration date.

Important Highlights

• Option writers earn premiums by offering the buyer rights to purchase or sell shares at a set strike price and expiration date.
• Options on stocks are generally traded in lots, with each lot representing 100 shares.
• The premium amount depends on factors like the current stock price, time until expiration, and the asset’s volatility.
• Key advantages include immediate premium income, potential to keep the full premium if options expire worthless, benefits from time decay, and flexible exit strategies.
• However, writing options carries risks, including the possibility of losses exceeding the premium received.

How Writing an Option Works

When you write an option, you create a contract that obligates you to buy or sell the underlying stock at the strike price if the buyer decides to exercise the option before its expiration. In return for this obligation, you receive a premium upfront.

The premium you collect is influenced by the stock’s current price, the time remaining until expiration, and market volatility, among other factors.

Advantages of Writing Options

Writing options offers several benefits:

• Immediate Premium Income: You receive the premium right away upon selling the option.
• Keep Full Premium if Option Expires Out-of-the-Money: If the stock price remains unfavorable for the option buyer, the option expires worthless, letting you retain the entire premium.
• Time Decay Works in Your Favor: As time passes, the option’s value decreases, reducing your risk and potentially allowing you to buy back the option cheaper.
• Flexibility to Close Positions: You can close your written option anytime by purchasing it back in the market, removing your obligation.

Risks Involved in Writing Options

Despite earning premiums, option writers face significant risks. For instance, suppose an investor writes a call option on Apple Inc. (AAPL) at a $200 strike price expecting the stock to remain flat. Unexpectedly, Apple announces a new 5G iPhone, and the stock price surges to $275 by expiration. The writer must sell shares at $200, incurring a $75 loss per share if they don’t already own the stock.

Losses can be unlimited if the option is "naked" (uncovered). However, if the writer owns the underlying shares (covered call), losses are offset by gains in the stock's value.

Real-World Example of Writing an Option

Imagine Boeing Company (BA) is trading at $375, and Sarah owns 100 shares. She expects the price to remain stable or slightly decline, while Tom believes it will rise due to an upcoming airline order.

Sarah writes a $375 November call option, collecting a $17 premium per share, totaling $1,700. Tom buys this call, gaining the right to purchase Boeing shares at $375 before expiration.

If the stock stays around $375, the option expires worthless, and Sarah keeps the $1,700 premium. But if the stock jumps to $450 after an order announcement, Tom exercises the option. Sarah must sell her shares at $375, resulting in a $7,500 loss offset partially by the premium received.

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