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Trading and Investment Terms

Writer

A writer can be defined as the seller of an option contract who creates a position to obtain a premium payment from the option purchaser.

Writers can sell call option contracts as well as put option contracts that are either covered or uncovered.

An uncovered position is also known as a naked option contract.

For instance, the holder of 100 equities of security can sell a call option contract on those equities to obtain a premium from the purchaser of the option contract; the position is covered as the writer holds the security that underlies the option contract and has consented to sell those equities at the strike price of the option contract.

A covered put option contract would include, being short the equities and writing a put option contract on them.

In the event that an option contract is not covered, the option seller, hypothetically faces the risk of very huge losses if the underlying moves against them.

Option contract purchasers are given the right to purchase or sell an underlying asset, within a certain period of time, at a predetermined price by the option seller.

For this right, the option contract has an expense, called the premium.

The premium is the thing that option sellers are after.

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