Short answer: Option selling means collecting a premium, an upfront payment, for granting another trader a right tied to a stock or index. The seller keeps that payment either way, but can face large losses, especially when holding no shares to cover the sold option.
Last reviewed: 14 November 2026
At a glance
| Term | What it means for the seller |
|---|---|
| Premium | Received upfront and kept whether or not the option is exercised |
| Time decay | Option value tends to erode as expiry approaches, which sellers aim to profit from |
| Covered call | Seller owns the underlying shares, so the premium offsets some downside and shares limit losses from a rising price |
| Naked call | Seller owns no shares, so a rise above the strike can bring losses with no cap |
| Stop-loss | Sellers are advised to use it to limit losses |
How does option selling make money?
An option is a contract that gives the buyer a right, not a duty, to buy or sell an underlying asset, such as a share, at a fixed price on or before a set date. A call option gives the right to buy, and the fixed price is called the strike price. The date on which the contract ends is called expiry, and the underlying is the asset the contract is based on.
The seller takes the other side. The seller receives the premium upfront and keeps it whether or not the option is exercised, meaning whether or not the buyer uses the right. The buyer has the right but not the obligation to exercise.
Sellers aim to profit from time decay. An option’s value tends to erode as expiry approaches, provided the underlying does not move sharply and volatility, the measure of how much prices swing, does not spike. If the option loses value, the seller can close the position more cheaply than it was sold for.
What is a covered call?
A covered call is a strategy where the seller already owns the underlying shares and sells a call against them. Because the shares are held, the seller can deliver them if the buyer exercises.
The premium offsets some downside, meaning it cushions a fall in the share price. If the price rises, losses are limited by the shares held, though the seller gives up gains above the strike price.
Here is a hypothetical example, with every figure invented for illustration. Suppose you hold 100 shares bought at Rs 500 each and sell one call with a strike of Rs 520 for a premium of Rs 10 per share, or Rs 1,000 in total. If the price rises to Rs 560 at expiry, the buyer exercises, and you deliver shares worth Rs 520 each. Your gain is Rs 20 per share plus the Rs 10 premium, or Rs 3,000 in total, and you miss the further rise above Rs 520.
What is a naked call, and why is it riskier?
A naked call is a call sold without owning the underlying stock. The seller collects the premium but holds no shares to deliver.
If the price rises above the strike, the seller must buy the shares at market price to fulfil the obligation. The loss grows as the price rises, and it has no cap. That is the key difference from a covered call.
Using the same invented figures, suppose you sell the Rs 520 call for Rs 10 per share without owning any shares, and the price rises to Rs 600 at expiry. You must buy at Rs 600 and deliver at Rs 520, a loss of Rs 80 per share. After the Rs 10 premium, the net loss is Rs 70 per share, or Rs 7,000 for 100 shares. At Rs 700, the net loss would be Rs 170 per share, or Rs 17,000.
What are the main risks for sellers?
The core risk is an asymmetry. A seller’s gain is limited to the premium, while a naked call seller’s loss can keep growing as the price rises. A small premium can be overwhelmed by one large adverse move.
Volatility adds risk. A sharp move in the underlying or a spike in volatility can raise an option’s value, which works against the seller even if expiry is still some way off. Time decay helps the seller only when the underlying stays relatively calm.
Option sellers are advised to use stop-losses, which are instructions to close a position if the price reaches a set level, in order to limit losses. Selling without a stop-loss leaves the seller exposed to large adverse moves. A stop-loss is not a guarantee, because a fast-moving market can trigger it at a worse price than the one set.
Frequently asked questions
Is option selling the same as buying options?
No. The seller receives the premium upfront and keeps it whether or not the option is exercised. The buyer pays the premium and has the right, but not the obligation, to exercise.
Does a covered call remove all the risk?
No. The premium offsets some downside, and the shares held limit losses from a rising price. The position still moves with the underlying shares, so it carries their risk.
What do option sellers use to limit losses?
Sellers are advised to use stop-losses. Selling without one leaves the seller exposed to large adverse moves.
Sources and last check
Facts in this article were checked against the sources below on 14 November 2026. Rules and figures can change; check the primary source before acting.
- 5paisa.com (broker education)
- kotakneo.com (broker education)
- icicidirect.com (broker education)
- groww.in (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.