Is Holding Options significantly less risky when compared with Writing Naked Options? or about the same?
Is Holding Options significantly less risky when compared with Writing Naked Options? or about the same?
Homework Answers
Yes holding options is significantly less risky when compared with writing naked options.
The risk of an option buyer is limited to the premium paid to purchase the option. Whereas, the risk of an options writer is theoretically unlimited.
Example: The current stock price is $95. The price of a call option is $3 for the strike price of $100.
The maximum risk the option buyer has is equal to the price of call option = $3 per share or $100 per contract.
On the other hand, the options writer has a significantly higher risk. The risk increases with increase in the share price. Theoretically, the share price can go up to any value: from 95 to 1000 and beyond.
If the stock price ends up at $1,000, the options writer would lose (1000 - 100) + 3 = $903 per share or $90,300 per contract.
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