option writing

🧾 What is Option Writing?

  • Selling options (calls or puts) to earn premium
  • Obligation vs right (writer has an obligation)
  • Two types:
    • Call writing (bearish or neutral view)
    • Put writing (bullish or neutral view)

💸 Why Do Traders Write Options?

  • Earn regular income (premium)
  • Higher probability of profit compared to buying options
  • Time decay (theta) works in your favor
  • Works well in sideways or range-bound markets

🔍 Types of Option Writing

  1. Covered Call Writing
    • Sell a call while holding the stock/future
    • Strategy for sideways to mildly bullish market
  2. Naked Call Writing
    • Sell a call without holding the stock (high risk!)
    • Not recommended for beginners
  3. Put Writing (Cash-secured)
    • Sell a put with cash margin available
    • Expectation: stock will stay above strike price
  4. Credit Spreads (safer)
    • Example: Bull Put Spread, Bear Call Spread
    • Limits loss with lower premium

🧠 Mindset and Risk Management

  • Option writing is not free money
  • Proper margin and capital allocation
  • Always use stop-loss or hedge
  • Manage trades around events or news

📈 Ideal Conditions for Writing Options

  • High IV (Implied Volatility) = Higher premium
  • Time decay benefits option writers, especially near expiry
  • Stocks in a range or showing low volatility

⚠️ Risks in Option Writing

  • Unlimited loss (especially in naked call writing)
  • Gap-ups or gap-downs can lead to heavy MTM losses
  • Black Swan Events (e.g., war, budget, RBI meet)
  • Margin requirements can increase suddenly

📊 Tools & Platforms

  • Use OI data and PCR (Put Call Ratio) to gauge sentiment
  • Option chain analysis
  • Greeks:
    • Theta (time decay – your friend)
    • Delta (direction risk)
    • Vega (volatility risk)

✅ Real-Life Example

  • Nifty at 22,000
  • Sell 22,500 CE for ₹40 premium
  • If Nifty closes below 22,500, you keep full premium
  • If Nifty goes above 22,500, MTM loss starts

🧾 Checklist for Writing Options

  • ✅ Do I have enough margin?
  • ✅ Is the market range-bound?
  • ✅ Have I checked news/events?
  • ✅ Is IV high?
  • ✅ Do I have a stop-loss plan?

🛡️ Safer Practices

  • Use hedged strategies (e.g., Iron Condor, Spreads)
  • Avoid overnight positions in uncertain times
  • Book profits early (e.g., when 50–70% premium decays)