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Trading Weekly Options + Online Video Course: Pricing Characteristics and Short-Term Trading Strategies by Russell Rhoads

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CHAPTER 9

Short Option Trades

When an option contract is sold, the seller takes on an obligation. The seller receives a premium or payment in exchange for taking on the obligation. If a call option is sold then an obligation is taken on. In the case of selling an equity call option the result is an obligation to sell a stock at a certain price any time up to expiration of that option contract. Conversely when a put option is sold the result is the obligation to purchase a stock at a certain price anytime up to the expiration date. The buyer of the option contract obtains a right. When a holder of an option decides to exercise their right a holder of a short position in that option has to make good on that right. This is referred to as being assigned.

Being assigned on a short option position may not necessarily be a negative outcome for a trade. Whether this is considered a negative relates to the motivation behind selling the option. When a put option is sold the seller takes on the obligation to buy a stock at a certain price. If the seller of that put would like to own the shares over the long term, then being assigned would result in a long stock position. If the intent of the trade is to take a long position in a stock, then assignment would be considered a positive event.

Another motivation behind selling options may be to collect income. The end game here is for the option to expire with no value and a profit being made equal to the premium collected when the option is ...

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