InvestorQ : When I write options, how do price movements actually affect my profits?
Dia Deshpande made post

When I write options, how do price movements actually affect my profits?

Answer
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Ria Jain answered.
2 years ago


Let us look at a practical example of if you had sold call options on SBI then what would have happened. Let us say that you sold an SBI 320 call option at Rs.5. Your risk starts above Rs.325. On the downside, even if the stop price falls to Rs.250, your total income as an option write will be limited to Rs.5 only. However, if the price of SBI moves above Rs.325, your losses can be unlimited. At Rs.350, your total loss will be Rs.25 and it continues limitlessly. That is why normally when you write options you have to take care of one of the things. Firstly, you have to write options with stop losses. Alternatively, you have to ensure that your short option is part of a hedged position so that you are not exposed to one-side risk.