I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Saturday, April 21, 2007

Potential Risk & Rewards of Options Buyer vs. Seller

Potential Risk & Rewards of Options Buyer
The maximum loss of a buyer of an option is the initial premium he pays for the contract, regardless of what happens to the stock. So, the risk to the buyer is limited, never more than the amount spent to buy the options, but the potential profit is theoretically unlimited.

Potential Risk & Rewards of Options Seller
On the contrary, in return for the premium received from the buyer, a seller of an option would need to take on the risk of having to sell (for calls) or buy (for puts) the stocks should the buyer decides to exercise his right. If that option is not covered by another option or a position in the underlying stock, the seller's loss can potentially be unlimited. Writing options without covered by another options (e.g. spreads) or a position in the underlying stock (e.g. covered call/put) is called writing Naked (Uncovered) Options. Since writing naked options has only a limited profit (i.e. the premium received) but is exposed to unlimited potential risk, it is not an advisable thing to do, especially for beginners.

For beginners, it’s much simpler just to buy calls if you expect a stock will increase or puts if you expect a decrease, which offers limited risk and unlimited potential profit. Only after you get more trading experiences and completely familiar with how options work, you may then choose to move on to learning more complex option strategies, which allow you to be a seller without getting exposed to unlimited risk.