When we say selling premium or short premium here at tastylive, that is simply referring to being on the short side of the options contract. The short side of the contract must stand ready to fulfill his or her obligations. This means a short call holder must be ready to sell stock at the strike price, and the short put holder must be ready to buy stock at the strike price.
A short call is a bearish position, where the short is hoping the long will not exercise his option. Thus, he needs the stock price to remain below the strike price. The most the short side of the contract can make is the premium he collected when he sold the contract, and the most the short side can lose is unlimited, as there is no cap on how high a stock can rise. The breakeven point on a short call is the strike price + premium. All of this is explained in detail using an example on DIS stock.
A short put is a bullish position, where the short is again hoping the long will not exercise his option. Thus, he needs the stock price to remain above the strike price. The most the short side of the contract can make is again only the premium he collected when he sold the contract, and the maximum loss for the short side would occur if the stock were to fall to zero. The breakeven point on a short put is the strike price – premium. An example with WFM is used to demonstrate all of this.
Even though the limited upside coupled with unlimited downside always “feels” like it’s going to be disastrous, it’s important to remember that you are no longer reliant on market direction to make money when selling options.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.