InvestorQ : How best can an option seller manage the unlimited risk he is exposed to?
Anamika Sodhani made post

How best can an option seller manage the unlimited risk he is exposed to?

Answer
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Anamika Sodhani answered.
2 years ago


Option writing is a specialized job, which is suitable only for the knowledgeable investor who understands the risks, has the financial capacity and has sufficient liquid assets to meet applicable margin requirements. The risk of being an option writer may be reduced by the purchase of other options on the same underlying asset and thereby assuming a spread position or by acquiring other types of hedging positions in the options/ futures and other correlated markets.

Most option sellers also keep strict stop losses to manage their risk. These levels are set based on the technical levels on the spot market. At that point they just terminate their losses and exit the position.

In the Indian Derivatives market, SEBI has not created any particular category of options writers. Any market participant can write options. However, the margin requirements are stringent for options writers. Hence retail investors and small investors must be very careful about writing options and not do it without understanding the risk entailed.