Selling Options
Selling options, whether calls or puts, is riskier than buying options since the downside risk (or potential loss) is similar to that of an outright futures position. For this reason, option sellers must deposit margin just like for a futures transaction, and may be required to deposit additional margin if prices move adversely. Beginning traders should be very cautious when considering the sale of an option.
Option sales can be covered or uncovered. An call option sale is covered if the seller owns the assets underlying the option. For instance, the seller of a COMEX December gold call option is covered if they also own or are long December gold futures. Alternatively, if the call option seller does not own the underlying futures, then the sale is uncovered or naked. Uncovered option sales are riskier than covered option sales since in the former, the option seller must enter the market to acquire the underlying futures if the option is exercised, and thus faces this price risk. The covered seller, in contrast, already owns the underlying futures and does not face this price risk. A put option sale is covered if the seller is already short the underlying futures, and uncovered is the seller has no such position in the underlying futures. Again, an uncovered sale is riskier than a covered sale.
When is an option a "better deal" for the buyer and when is it a "better deal" for the seller? That depends on the investment objectives of each party to the contract and on the future market value of the underlying asset. No one would sell a call option for an asset that is expected to rise sharply over the option period. Sellers write call options only if it is expected that the market price of the underlying asset has a high probabilty of either staying flat or going down.
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