I used to know someone who traded on the floor of the NYSE. Here is something they told me about options. I wrote it on a piece of paper years ago that I just found recently.
call (right to buy) – in the money when market above strike price
put (right to sell) – in the money when market below strike price
|Type||Buy (long underlying)||Sell (short underlying)|
|Call||limited risk, unlimited gain||limited gain, unlimited risk|
|Put||limited risk, unlimited gain||limited gain, unlimited risk|
If selling has limited gain and unlimited risk, why do it? From what I wrote: “Premium upfront ( most options expire worthless); Higher chance of making money; may sell near maturity”.
From another sheet:
Options – downside – limited to price
short option – limited gain, unlimited loss. Cash upfront. Margin required.
Covered call – write call/put -> selling that option