Jim Woods

Writing Options: Put and Call Writing Explained

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Making money in any type of market can be an extremely trying proposition. You've got to pick the right stock, pick the right options -- oh, and you're timing also has to be right.

Considering how many components are involved with a successful trade, i.e., how many things you have to get right, why not take greater control of the variables by writing your own ticket?

Writing your own ticket involves writing put and call options. And though the goal of put writing versus call writing is different in a strategic sense, the ultimate goal of increasing your overall gains -- along with your overall wealth -- is one and the same.

Let's take a look at how we can make money writing puts, and then we'll take a look at how to do the same by writing calls.

'Put'-tin on the Ritz: Writing Put Options

You often hear about a public company making the move to repurchase a block of its own shares on the open market. This is good for shareholders because it reduces the number of shares outstanding, while typically boosting the value of existing shares. It also increases a company's earnings per share.

When PC moguls Bill Gates and Michael Dell wanted to do a share-buyback program for their respective empires, they took advantage of the options markets to increase the return on their investment. What they did was write (or sell) put options, and by doing so they created a win-win situation with their stock performance.

How was this accomplished?

Well, when put contracts are written, if the stock goes down in value then the shares are "put" to the writer (i.e., to buy from the owner of the shares). But if the market price spikes, as the person who has shorted the puts, you get to keep the premium you collected when you initiated the position (as "selling to open" an options position oftentimes results in an initial credit to your trading account).