An option is a financial contract that grants its holder the right, but not the obligation, to buy or sell an underlying asset (such as a stock) at a predetermined strike price on or before a specified expiration date. The option buyer pays a premium for this right; the option seller (writer) receives the premium but must fulfill the contract if the buyer exercises.

At its core, options trading seeks to profit from forecasting the future direction of an asset’s price or the magnitude of market volatility (sharp rise, sharp fall, or stability).

Basic Trading Strategies: Selling Puts and Calls

When you believe the stock price will stay above a certain strike, you can sell a put option. You collect the premium as income. If, at expiration, the stock closes below the strike, you are obligated to buy the shares at that strike. Because you already received the premium, your effective purchase cost equals the strike minus the premium—effectively a discounted entry price. This works if you are willing and able to acquire the stock at that level.

When you believe the stock price will stay below a certain strike, you can sell a call option. You likewise pocket the premium. If, at expiration, the stock price is above the strike, you must deliver shares at that fixed price. Key warning: an uncovered (naked) call is extremely risky because the stock can, in theory, rise indefinitely. Typically, traders write calls only when they already own 100 shares of the underlying (a covered call) to generate extra yield on the holding.

Choosing Contracts and Avoiding Pitfalls

Selecting which contract to write involves three trade-offs. First, the strike price must align with your view (support level for puts, resistance level for calls). Second, the expiration: longer terms pay richer premiums but introduce greater uncertainty. Third, the premium itself—driven by implied volatility and time value—is your direct income.

Beware of traps. Avoid stocks heading into an earnings release, where unpredictable swings can overwhelm your thesis. Steer clear of names that have just crashed or spiked and remain unsettled—lacking a clear floor or ceiling. Favor relatively calm stocks with steady uptrends or well-defined technical support. For cash-secured puts, set the strike at or below that support or recent lows.

Timing the Trade: Opening and Closing

Option writers exploit theta decay—the erosion of time value. Many sell short-dated options on Thursdays or Fridays that expire the following week or the week after, capturing weekend decay. You can ladder entries—sell part on Thursday after review, complete the rest on Friday.

There are two exit approaches. If the market behaves, your margin is ample, and fresh trades are not hindered, you may hold to expiration and let the option expire worthless, keeping the entire premium. Alternatively, you can buy to close early to free margin, lock in gains, or sidestep risk—especially once most of the option’s value has already decayed.

Seller vs. Buyer: Strategy Characteristics Compared

As an option seller, time works in your favor, and statistically, selling (particularly out-of-the-money) options offers a higher win rate than buying. By continually writing contracts that match your market view, you aim to monetize both probability and time. Your maximum profit equals the premium received, but risks differ by strategy: cash-secured puts require capital to take assignment, while naked calls carry theoretically unlimited loss and must be avoided or strictly hedged.

Conversely, buying options suits other scenarios. If you are strongly bullish and plan to hold long term, purchasing a long-dated call (180 days or more) can offer a superior risk-reward entry. For a quick speculative pop, a near-term call (expiring within a month) delivers higher leverage but costs more and decays faster. Overall, buyers face lower statistical win rates, yet when they win—through a major price move or volatility spike—the upside can far exceed that of sellers, exemplifying the “small losses, big wins” leverage profile.