Option selling strategies, and the risks they carry
Selling an option collects premium up front in exchange for an obligation. Time decay works for you, but several of these positions carry theoretically unlimited loss. This section explains exactly where the risk sits before it explains where the reward does.
What are option selling strategies? Option selling strategies collect a net premium in exchange for an obligation to buy or sell the underlying. Theta works in the seller's favour, but naked calls carry theoretically unlimited loss and naked puts carry loss down to zero. Covered Call and Cash-Secured Put are the collateralised members of this family.
Covered Call
NeutralCovered Call is a long position in the underlying with a call sold against it: the premium lowers the cost of the holding and caps its upside at the …
Cash-Secured Put
BullishCash-Secured Put is a short put backed by enough cash to buy the underlying at the strike if assigned: you collect a premium for accepting the obliga…
Naked Put
BullishNaked Put is a short put held on margin rather than against reserved cash: the payoff is identical to a cash-secured put, but because only margin is …
Naked Call
BearishNaked Call is a short call with no underlying and no long call above it: the premium is the entire reward, while the loss is theoretically unlimited …
Short Straddle
NeutralShort Straddle sells a call and a put at the same strike, collecting both premiums to profit if the underlying barely moves: the combined credit is t…
Short Strangle
NeutralShort Strangle sells an out-of-the-money call and an out-of-the-money put, collecting both premiums to profit if the underlying stays between the str…
Collar
NeutralA Collar holds the underlying, buys a protective put below the current price and sells a call above it, so the loss is floored below the put strike a…
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Frequently asked questions
What are option selling strategies?
Option selling strategies collect a net premium in exchange for an obligation to buy or sell the underlying. Theta works in the seller's favour, but naked calls carry theoretically unlimited loss and naked puts carry loss down to zero. Covered Call and Cash-Secured Put are the collateralised members of this family.
How many option selling strategies are there?
StrategyGyan documents 7 option selling strategies in full, each with a payoff diagram, its Greeks, its maximum profit and loss stated as a formula and as a worked number, and both NIFTY and BANKNIFTY examples.
Which of these has defined risk?
Collar carry a structurally capped maximum loss. Covered Call, Cash-Secured Put, Naked Put, Naked Call, Short Straddle, Short Strangle do not — their loss is bounded only by how far the underlying can move.