InvestorQ : Is it true that time favours the seller of the option more than the buyer of the option?
Abhi Yadav made post

Is it true that time favours the seller of the option more than the buyer of the option?

Answer
user profile image
Abhisha Yadav answered.
2 years ago


That is absolutely true. As time passes, options become less valuable and hence the seller benefits as he would prefer that the options expire worthless. For the option seller time value works in his favour. When you have sold an option, premium will keep depleting with time giving the seller an opportunity to exit the position at a profit by buying it back at lower levels. Thus the option seller’s relationship with time is exactly in contrast to an option buyer, where the time works against him.

It is precisely for this reason that selling options are extremely effective as a cost reduction strategy by using covered calls. Let us look at two such instances. If you had bought Hindustan Unilever in the cash market at Rs.1600 and it is down to Rs.1450, what do you do? Let us say, you are convinced that over the next one year the stock will touch Rs.1900 due to improved profit performance. Even as you hold the stock, you can keep selling higher call options. If the options expire worthless, then the premium earned will reduce your cost of holding Hindustan Unilever. On the other hand, if in a worst case scenario the stock shoots up sharply, then you anyways have your long equity position as a hedge. Secondly, in case of option spreads, selling options have an important role to play in reducing the cost of buying options.