Jim Woods

Writing Options: Put and Call Writing Explained

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Either way, it's better for the shareholders of a company participating in a buyback because it ultimately means that the company is purchasing its stock back at lower prices, thus increasing the return on the investment for the company and, in turn, its shareholders.

Of course, writing puts isn't just for the big guys. Individual traders can use this technique to enter into a long stock position.

Just keep in mind that when you're selling a put option, you don't expect the stock price to drop below the exercise (or strike) price, nor to increase significantly. That way, if the option owner assigns you to buy the stock, you will do so at the strike price of the option.

So if a stock is trading for $25 and you short a $22.50 put, if the share price dips to $22.50 and the option holder "puts" that stock to you, then they've saved you the legwork of making the purchase and you're now the owner of the stock you were planning to buy anyway.

The 'Call' of the Wild: Writing Call Options

Often investors cite their fear of risk as the reason why they might shy away from trading options. And while the level of risk can increase with some of the more complicated options strategies out there, that's not the case with writing covered calls.

In fact, writing covered calls is one of the most frequently used and safest options strategies, because it is one of the most conservative plays a trader can make.

On the surface, writing covered calls seems like hitting a home run. Also known as a "buy-write," this strategy involves selling call options against stock that you already hold long.

When you sell an option, you immediately collect a premium up front, and because options settle in one business day, the credit you collect hits your trading account a day later. It's like you get to make money just because you decide to.