Selling Options

If you write, or sell, options, you have no control over what the buyer of that option decides to do. You're obligated to fulfill your side of the contract should the holder choose to exercise. If you sell a call and the option is exercised, you must sell the underlying at the strike price to the option holder. If you sell a put and the option is exercised, you must purchase the underlying at the strike price.

Option writers generally anticipate the stock will move in the opposite direction from option buyers or remain stable. Thus, it's often the call writers who tend to be bearish and the put writers who are typically bullish.

For example, if you sell a call with a strike price of $52 on a stock trading at $50 a share, you hope the price will either remain stable or lose value, leaving the contract worthless. Similarly, if you sell a put with a strike price of $52, you hope the price will stay above the strike price, so the buyer will not exercise and the contract will expire without any value. When the contract expires, you make a profit because you keep the premium, or the amount the buyer paid to purchase.

However, regardless of how strongly you believe a stock's price will move in the direction you anticipate, you can never be certain it will. It's always important to understand all of the risks and costs associated with an options strategy before making an investment.

What's an Assignment?

If you've sold a call that is exercised, you must deliver the shares to your brokerage firm. The Options Clearing Corporation (OCC) randomly assigns exercised calls to brokerage firms, and the firm that receives an assignment assigns it in turn to a client who has sold the contract in question. That client must meet the assignment, selling the agreed upon number of shares at the call's strike price.

Examples exclude transaction costs and tax considerations.

Options involve risk and are not suitable for all investors. Detailed information on our policies and the risks associated with options can be found in Scottrade's Options Application and Agreement, Brokerage Account Agreement, and Characteristics and Risks of Standardized Options (available at your local Scottrade branch office or from the Options Clearing Corporation at 1-888-OPTIONS or by visiting www.888options.com). All option accounts require prior approval by Scottrade. Market volatility, volume, and system availability may impact account access and trade execution. Supporting documentation for any claims will be supplied upon request.