Issue options
 

Issuing options means selling option contracts. You give the buyer of the option contract a promise that at an agreed time in the future (expiry date), you will buy back or sell the underlying instrument at an agreed price (strike price). By underlying instrument, is meant the instrument to which the option contract applies.

Let's take two examples

 

You issue / sell an option contract for the company Tesla. You hereby assume responsibility for buying/selling shares of the company at an agreed price in the future.

Issue call options:


When you issue a call option, you assume the obligation to sell shares in Tesla at an agreed price at the agreed expiration date. As an issuer of call options, you have faith that the share will fall or stand still during the contract period, while the buyer believes the share will rise. If the share price rises, you will have to sell shares to the buyer of the contract equal to the contract size, if the buyer exercises the contract. Let's say you have entered into an agreement of 3 option contracts (3 x 100), which corresponds to 300 underlying shares. You then have the responsibility/duty to sell 300 shares at the agreed price (strike price), if the buyer exercises the contract.

 

Let's say Tesla costs 100$ per share when you entered into the contract, if Tesla is at 120$ when the option date expires, the buyer of the contract can ask you to sell your shares at 100$ per share to him. He has then earned 20$ per. share (300pcs) with this trade.

Issue put options:

When you issue a put option, you assume the obligation to buy shares in Tesla at an agreed price at the agreed expiry date. As an issuer of put options, you have faith that the stock will rise or stand still during the contract period, while the buyer thinks the stock will fall. If the share price falls, you will have to sell shares to the buyer of the contract equal to the contract size, if the buyer exercises the contract. Let's say you have entered into an agreement with three options contracts (3 x 100), which corresponds to 300 underlying shares. You then have the responsibility/obligation to buy 300 shares at the agreed price, if the buyer exercises the contract.

 

Let's say Tesla costs 100$ per share when you entered into the contract, if Tesla is at 80$ when the due date expires, the buyer of the contract can ask you to buy his shares at 100$ per share. He has then earned 20$ per. share (300pcs) with this trade.

Compensation

To give this promise to the buyer of the option, he, therefore, has to pay a premium to the issuer, as compensation for this promise/obligation. Premium is a price that is agreed upon before the option contract is signed. When buying and selling options, this is done in the same way as with stock trading with an order book. The seller and buyer place orders that they think are acceptable to enter into a contract,  if they agree, the contract will be entered into automatically by the broker. As an issuer, you will automatically receive the premium into your account as soon as the transaction is completed. The money is yours regardless of how the option contract goes in retrospect, there is a fixed compensation that is paid for you entering into the contract and making the obligation.

As an issuer of options, the risk is in theory infinity to the upside and 100% to the downside. You can also only earn money equal to the premium received for entering the trade. It's therefore really important that you understand these principles well before start issue option contracts.

Issuing options do also demand some kind of margin accountability. The size of the required margin depends on how large a position you are going to issue. The reason why the brokers want you to have margin is that you need to have coverage in case the trade goes against you and that you actually have to provide the underlying instrument. There are many large investors and institutions which does issue option contracts. An investing strategy behind this can be found here and is called "cash secured puts". 

As an issuer of options, you must calculate how much risk you want to have compared to the premium you receive. As mentioned, there are many large investors who issue options in the same way as insurance companies do. They then calculate the probability that an option contract will go ITM (In the money) and demand a premium accordingly. If you issue/sell options contracts in this way, you need to think like an insurance company. They get a fixed monthly/quarterly sum which is supposed to offset for the times when the buyer of the insurance/options contract actually needs/exercises the contract.  

 

As a seller of option contracts, you always want the contracts to be worthless (OTM) when they expire. You then earn a small fixed sum (premium) for each option contract. The amount you collect for this must be assessed on the basis of the probability that a certain situation will or will not occur.

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