Options Trading Strategies - Covered, Naked, Or Partly Exposed?

Options Trading Strategies - Covered, Naked, Or Partly Exposed?

When options trading to make money for income, there are countless strategies available. Finding one that you are comfortable with, that you have a sound understanding of, and that suits the current market conditions, is one of the keys to successful trading.

One thing you need to bare in mind is that there is always another trader on the other side of the trade doing the exact opposite that you are doing.
So if you are trading and you have bought an option, someone else has sold it to you, and the premium you have paid is their income.

When you buy an option, you are said to be a Taker.

When you sell an option, you are said to be a Writer.

That is not to confuse a writer with someone who has previously bought an option to open a position, only to later sell it to close that position.
As the writer of an option, you ARE obligated to buy or sell the shares should someone wish to exercise their right.

Whereas, an option taker has NO obligation. If they chose to do so, they could let their option expire worthless, a writer can't.

When you take, or buy an option, you are said to be long that position.
When you write, or sell an option you are said to be short that position.

WHY WOULD YOU WRITE A STOCK OPTION?

There are several strategies that involve the writing of options. As an options writer, you are generally doing so to receive the premium paid as income.

When writing options there are two ways to expose yourself to risk.
You can write options COVERED or NAKED

For example when you write Covered Call options, it means you actually own the stock you are writing options over and are looking to make some additional income.

Even if the option holder exercised their right and you had to sell your shares, you would still keep the premium you received.
Writing Naked options means you are promising to buy, or sell shares you do not own.

An example would be if you wrote a naked Put Option. You are obligated to buy someone's shares from them at a price higher than market value if you get exercised, resulting in an unlimited loss.

This can be a very dangerous strategy if you don't fully understand the possible outcomes.

However, there are advanced options strategies that allow you to write options to collect premium with insurance to minimize your risk. This means you are almost covered, and can actually make money out of nothing.
Your choice of strategy really depends on your comfort level with the risk associated with each and what results you are trying to achieve.

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