subject: Writing Options in Neutral Markets [print this page] Writing Options in Neutral Markets Writing Options in Neutral Markets
With naked options, the contracts can expire worthless and the investor can collect their entire premium. The premium is the amount invested. When doing a combination trade, you cannot collect the entire amount invested because certain contracts will offset others. For example, in a short straddle, both a call and a put are sold. One of those contracts will offset the other. A sold put bets the stock will move higher and a sold call bets the stock will move lower. When trading naked, if the contracts approach the day of expiration, the entire premium could potentially be collected. It's best to allocate a small percentage of the portfolio when writing calls and puts. The reason is that the investor may have to deliver their shares if they have an uncovered position. This is called assignment, a procedure done by the Options Clearing Corporation to assign exercise notices to the accounts with each Clearing Member.
