Options writing vs. options buying and selling?

Question

My uncle trades options, and he was telling me something about how when you sell an option, you have no obligation, but only the "original" writer has an obligation, the person who actually first released the options into the market. My uncle also writes options too, in which he says he does have an obligation and he said it brokerages, for example Etrade charge around a $2 fee for "writing" options. And thats the pro of writing them over simply buying and selling them. Because when you buy and sell them, you have to pay for the options, contract fees, etc.

So is this true? If I buy options in the market, and then later sell them for a profit, do I have an obligation as if I would have one if I was the original writer?

Answer 1

I have given the answer to your additional details in your email. See if it is sufficient. Let me state though to your last paragraph. Two things can happen. Profit is made only during the expiration day to your bought option in which some one will be conditionaly assigned or your original seller pays for the already gone to 'in the money' state of your option.
The other is if you feel that your bought option has gone into 'in the money' if you realise your profit by writing an option and if by chance your option moves up in higher beyond the price you got for writing then you will have to pay for the difference. But you will have your original bought option which will also be making money as the price move up and you break even.
In case when you write on your bought option if the price starts moving down after you sold or wrote then you will get you can keep your price. But you will forefeit only the price you paid for buying the option.
For your question of obligation when writing, the answer is you will be always obligated. The only way you can get out of it is when you write and price move down in which case you can pocket the premium or price you got for selling the option.
If the price move up you will be asked to pay the difference between that days price of the underlying security and the strike price. Only rarely you will be obligated for physical delivery of shares. When you pay the difference that is what is happening the physical delivery since the buyer will pay the strike price and you will pay the difference which will add up to the price on expiry day and the broker puts down this money buys the stock and hand it over to the buyer of the option who insists on physical delivery. This happens rarely. When you pay the difference your obligation is satisfied.
All what I have written is about European Options where you cannot get out till period of expiry. In American option you can liquidate your position before expiry.

Answer 2

The difference is if your order is a 'sell to open' or 'sell to close'. A sell to open is writing. This means you didn't have the option in your account, you are placing it in the market. You're account will read '-x' under how many contracts you have. It is like a short position on a stock. But with the option, the short position can be resolved 3 ways: assignment, expiration, or you buy it back via 'buy to close'.

Sell to close is not writing, but it means you have a long position in the contract you are selling. You just belive it is no longer profitable to keep so you are closing.

If you don't have the option in your account, you will alway writing, creating the '-x' or short position in your account. When you do this there is always an obligation to either buy the stock if it is a put, or sell if it's a call. However, the obligation only stands at expiration if it's in the money. If it is out of the money, the option holder won't exercise, unless stupid, and it expires worthless.

I actually like to be on the obligation side of the option trade. Once I started doing that, I started makin a lot of money. See my blog for technigues. The address is 'gmoolah.blogspot.com' and look for posts under 'Creating Investment Cashflow: PartX. There are 3 parts.

Finally, your brokerage will not allow to hold the obligation via writing options unless either you have sufficient level of trading to do so, or have something to cover. For example, I trade on Etrade for now. They have option levels 1-4. With option level one you can only sell covered calls. This means you own 100 shares of the underlying stock and selling the right for the option buyer to buy the stock from you at the strike price. This is low risk because you own the stock anyway. Level 2 is mainly for buying options but you can also sell put options if you have a short position in 100 shares per contract. Level 3 allows covered calls on other calls, usually LEAPS. I love this strategy. Also, it allows uncovered puts which I use a lot, but I must have enough margin or funds in my account to fill the obligation to buy the stock. It can be dangerious, but it has worked well for me. And finally, level 4 allows naked call selling, which is too dangerous. I will not do it.

So,the summary is: if you have the contract in your account, and sell it, you are not creating the obligation. You are simply closing your long position. If you don't have it, you are writing it, and creating an obligation for yourself.

Answer 3

there is not any element in work out and then merchandising the inventory-it may well be an further cost- purely sell the alternative and take your income. A lined selection is the place you carry the inventory. So in case you held one thousand XYZ you should write a decision or purchase a put in XYZ techniques. If the call optrion became into called you basically grant your inventory. in case you come to a call to exercising the placed you could placed (sell) your inventory to the author.