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

Neutral

Covered 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 …

Own the underlying + sell 1 OTM call against it Undefined →

Cash-Secured Put

Bullish

Cash-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…

Sell 1 OTM put with the full assignment value set aside in cash Undefined →

Naked Put

Bullish

Naked 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 …

Sell 1 OTM put on margin, without setting the strike value aside Undefined →

Naked Call

Bearish

Naked 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 …

Sell 1 OTM call on margin, with no offsetting long — educational only Undefined →

Short Straddle

Neutral

Short 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…

Sell 1 ATM call + sell 1 ATM put at the same strike Undefined →

Short Strangle

Neutral

Short 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…

Sell 1 OTM call + sell 1 OTM put at different strikes Undefined →

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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 6 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?

None 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.