When you are writing an option you need to pay the margin for that why because here when you’re selling the option the risk will be high and exchange blocks the margin when you done this trade, at the same time when you r buying the option you no need to pay extra margin for this you need to pay only the premium
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- Losses can be infinite. When you short sell, your losses can be infinite. A shorting cover order loses when the stock price rises and a stock is (theoretically, at least) not limited in how high it can go. For example, if you short 100 shares at each hoping to make a profit but the shares increase to apiece, you end up losing ,500. On the other hand, a stock can't go below 0, so your upside is limited. Bottom line: you can lose more than you initially invest, but the best you can earn is a 100% gain if a company goes out of business and the stock loses its entire value.
- Shorting covers involves using borrowed money. This is known as margin trading. When short selling, you open a margin account, which allows you to borrow money from the brokerage firm using your investment as collateral. Just as when you go long on margin, it's easy for losses to get out of hand because you must meet the minimum maintenance requirement of 25%. If your account slips below this, you'll be subject to a margin call, and you'll be forced to put in more cash or liquidate your position. (We won't cover margin in detail here, but you can read more in our Margin Trading tutorial.)
*Note : Reffered from "INVESTOPEDIA"
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HI
because writing options means obligation to sell @ the price and writer receives premium. if the buyer is ready to buy and buyer has already paid the premium so the contract has to be settled to avoid risk.So option writer require more money .
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Option writing is more expensive than buying options as the option writer is liable to unlimited losses,whereas the option buyer losses as much as he has invested( Premium paid).
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Controlling Risk
The call writer does have some risk-control strategies available. The easiest is to simply cover the position by either buying the offsetting option or, alternatively, the underlying stock. Obviously, if the underlying stock is purchased, the position is no longer naked, and it does incur additional risk parameters. Some traders will incorporate additional risk controls, but these examples require a thorough knowledge of options trading and go beyond the scope of this article.
Generally, writing naked options is best done in months that are closer to expiring rather than later. Time decay (theta) is one of your best friends in this type of trade, as the closer the option gets to expiration, the faster the theta will erode the premium of the option. While it won't change the fact that this trade has unlimited risk, choosing your strike prices wisely can alter your risk exposure. The farther away you are from where the current market is trading, the more the market has to move in order to make that call worth something at expiration.
*Note: Refered by neked option
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Controlling Risk
The call writer does have some risk-control strategies available. The easiest is to simply cover the position by either buying the offsetting option or, alternatively, the underlying stock. Obviously, if the underlying stock is purchased, the position is no longer naked, and it does incur additional risk parameters. Some traders will incorporate additional risk controls, but these examples require a thorough knowledge of options trading and go beyond the scope of this article.
*Note- Refered by Naked option.
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Option shorting gives the buyer, the right (but not the obligation) to buy(in case of call) or sell(in case of put) the underlying instrument. So the buyer has limited risk(premium) and unlimited profit.
So the brokers are blocking a higher margin to settle the (unlimited) loss for naked shorting.
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- An investor can profit on changes in an equity’s market price without ever having to actually put up the money to buy the equity. The premium to buy an option is a fraction of the cost of buying the equity outright.
- When an investor buys options instead of an equity, the investor stands to earn more per dollar invested - options have "leverage."
- Except in the case of selling uncovered calls or puts, risk is limited. In buying options, risk is limited to the premium paid for the option - no matter how much the actual stock price moves adversely in relation to the strike price.
Given these benefits, why wouldn’t everyone just want to invest with options? Options have characteristics that may make them less attractive for certain investors.
- Options are very time sensitive investments. An options contract is for a short period - generally a few months. The buyer of an option could lose his or her entire investment even with a correct prediction about the direction and magnitude of a particular price change if the price change does not occur in the relevant time period (i.e., before the option expires).
- Some investors are more comfortable with a longer term investment generating ongoing income - a "buy and hold" investment strategy.
- Options are less tangible than some other investments. Stocks offer certificates, as do bank Certificates of Deposit, but an option is a "book-entry" only investment without a paper certificate of ownership.
Options aren’t right for every investor and are just right for others. Options can be risky but can also provide substantial opportunities to profit for those who properly use this very flexible and powerful financial instrument.
Referred by nasdaq.com
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Writing a call means a selling a call option to some who is betting on a stock going upwards, If the stock does not move upwards, and goes downwards you get to keep the whole premium. But the problem is that your maximum profit is limited to the premium you earned, selling the call no matter how low the stock went. Writing an option has unlimited risk than buying an option which has limited risk to premium. So we require more money for selling an option.
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When you buy an option contract, you pay only the premium for the option and not the full price of the contract i.e. 5050=2500, so here loss is limited & profit is unlimited. Where as in option shorting, the seller has a limited gain but his potential losses are unlimited. Therefore, the seller of an option has to deposit full margin amount with the exchange, via his broker, as security in case of an adverse movement in the price of the options that he has sold the option for ex 50175=8750/- (50-175=125*50) loss of rs.6250/-.
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The reason why margin is required more for writing or shorting an option is there is no upper level where the price can shoot up; price can go up to any extend.
If you are writing/shorting an option your profit is limited whereas your loss is unlimited, so that’s the reason the margin for writing/shorting an option is more compare to buying an option.
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When we buy options that time we have to pay premium and maximum loss will be the premium paid by us. But when we write or short options, there is no upper circuit for it. Just to manage that risk Exchange has made regulations to maintain higher margin for writing options.
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We require more margin to write an options because of the risk involved here (unlimited loss - if market goes against the expected ).
Neither company will not let bear the loss on client’s behalf - there cannot be mutual understanding as such
Nor the company cannot keep collecting the amount lost by each individual
better to have sufficient amount in our account and be ready to bear the loss if market goes negative
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In option buying there is limited risk i.e., premium*lots and unlimited profits as market might go up unlimited but in option writing/shorting there is unlimited risk and limited profit as market might go unlimited so there is a risk of recovering the unlimited losses hence the money required for shorting option is more compared to buying options.
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HI,
Because risk is unlimited and profit is limited on short option,.(short option strategies),
and risk is limited and profit is unlimited on Buy option.(Long option strategies) that's the reason more margin is required
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Writing an option is you run the risk of unlimited loses which is why the brokerages charge you for higher margins.Your loses are limited to the amount you pay when you are buying an option.
Of the above example , writing an option gives you a limited profit (2500) and unlimited loss so why the brokerage charges you the high margins.
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Hi Tarzan,
When you buying options index we need to pay only premium amount for ex: if we buy nifty 7500 call option we need to have 950 RS only. But when you write/short options the risk is unlimited so exchange collects the span and exposure margin.
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The reason why we need more margin is because for shorting an option the Risk is unlimited and the seller of the option has limited profit as premium recd by him , with the obligation of delivering the underlying assets.
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Shorting of an option has limited profit and unlimited risk.
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For buying options we required only the premium margin, if the market is goes up the buyer will get a the profit, if market is goes down the seller need to have the full margin to squire up.
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