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
Self portrait of Zinaida Serebriakova (1884-1967), assumed allowed under Fair Use.