If you work with Options want to trade, the option writer strategy could be of interest to you. In this article, you will learn how the strategy works, which parameters can have an influence and which trading opportunities arise.
Option writer - Definition
Der Begriff Style holder is used synonymously for issuer, option writer or option seller. This is a Seller of a Option. The latter waits and has to "hold still" and see whether the buyer will exercise his right.
In return for his commitment, a writer receives a Premium. He receives this in return for selling (call option) or buying (put option) the underlying asset behind the option within a fixed period at a certain price under certain conditions.
You can choose between European options and American options can be distinguished. With American option types, the writer is only bound to his obligation at the end of the term, whereas with European option types, the writer is bound for the entire term.
Stillhalter models - A concrete example
Suppose an investor decides to generate additional income alongside his main job. He already owns 100 shares of a particular company and would like to Call option while continuing to hold his shares.
He opens a call option on these 100 shares, which Covered Call and thus becomes the writer. In addition, he receives a premium for the right that he grants to the seller.
There are then two possibilities that can occur:
- It is possible that the share price is higher than the strike price including the premium, as a result of which the share is derecognized for the writer. He can keep the price gains made up to the strike and the premium
- It can also happen that the share price is below the strike price on the maturity date. In this case, the option may expire worthless. The writer can keep the premium
Stillhalter strategy - What are the influencing factors?
There are various factors that have an influence on the success of the writer strategy. These include, for example Expiry date and the Runtime of the option. If the time value is higher and all other parameters remain the same, the option has a higher probability of ending as an in-the-money option.
The strike price is also very important. The further an option is out of the money, the further away the strike price is from the current price of the underlying asset behind it. If the difference is large, the Premium increasingly lower. This happens because exercising the option becomes more unrealistic.
Cover pool transactions and their forms
There are basically two different forms of covered and uncovered trades:
- Covered businessAn option is considered covered if there is a certain degree of hedging. The seller holds the underlying asset or the financial means to buy it if the buyer demands his right
- Uncovered businessA transaction is considered uncovered if no direct capital is available in the event of exercise. Trading in such options is associated with a higher risk
Trading options for transactions with a writer
In the case of writer transactions, there is the option of smooth or close. It is always possible to buy a put or call option on the same underlying with the same parameters such as expiry date and strike.
There is also the possibility of Rolling a position. In this case, a repurchase and reopening takes place with a different strike price and maturity date. This variant enables adjustment to changing forecasts.
There is also the option of Option easy to holdif it is out of the money and wait as a writer and profit from the time value loss. This is the preferred option, especially if the trend is as expected.
Conclusion: option writer
In summary, a writer is a Seller of an optionwho waits to see whether the buyer wishes to exercise the rights he has acquired. The seller makes it possible to buy or sell the underlying asset behind the option at a certain price at a specified time. In return for passing on this right, the seller receives a Premium.
There are various factors that can influence the success of the writer strategy. These include, for example Expiry date, term and strike price. In addition, a distinction is made between a covered and one uncovered transaction without hedging.
When trading with writer transactions, there are three options for action. Positions can be closed or closed out by opening a put or call option with the same parameters. In addition, you can simply wait and see if the trend develops as expected. Alternatively, positions can be rolled: A repurchase and a new opening with adjusted parameters take place.