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Instead of buying an option, you can sell it. The decision of whether to exercise the option or not will still be with the buyer and not you as the seller. Hence, if you should take up the position of a seller, you will have no say in the matter.
Long Position: you have bought the call or put option from another party. You are known as the buyer.
Short Position: you have sold the call or put option to another party. You are known as the seller or the writer.
Your payoff and profit will be the direct opposite of your counterparty. In other words, your payoff as the writer of the option can never exceed $0 and will always be negative or 0. Because of the premium you received at the start from the buyer, your profit can be positive.
It is extremely important to note that unlike when you buy an option, when your loss is limited to the amount that you paid as premium and the profit is unlimited, when you are the writer of an option, your profit is limited to the amount that you received as premium and the loss is unlimited for call options.
Let’s use this example:
We will take the perspective of the seller.
OPTIONS 101: LONG vs SHORT POSITION. COMPLETED. ✅
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