The Obligation of the Options Seller
The first four articles focused mostly on the “right” of the option buyer. This final article is a critical risk warning focused on the obligation of the options seller.
When you sell (or “write”) an option, you collect premium, but you take on the legal obligation to perform the action if the buyer chooses to exercise their right. This event is called Assignment.
| Position Sold | Obligation if Assigned |
| Short Call | You must sell 100 shares of the underlying stock at the strike price. |
| Short Put | You must buy 100 shares of the underlying stock at the strike price. |
Covered vs. Naked Positions
The risk of assignment is directly tied to whether your option is covered or naked (uncovered):
- Covered: You have the necessary cash or shares to meet the obligation.
- Example: Selling a Covered Call (you own the 100 shares). If assigned, you simply deliver your existing shares.
- Example: Selling a Cash-Secured Put (you have the cash reserved to buy the 100 shares). If assigned, the cash is used to buy the shares.
- Naked: You do not have the necessary assets to meet the obligation. This exposes you to potentially unlimited risk and requires a margin account.
- Example: Selling a Naked Call (you do not own the stock). If the stock price skyrockets, you will be forced to buy the stock at the high market price and sell it at the lower strike price. This creates an unlimited loss potential.
The Danger of the Margin Call
Brokers allow you to use margin (borrowed money) to hold naked positions. They require you to keep a minimum amount of equity (cash or collateral) in your account, called the maintenance margin.
If the stock moves violently against your naked short option, your broker will demand that you deposit more cash immediately to meet the margin requirement. This is called a Margin Call.
Failing to meet a margin call will result in the broker forcibly closing your positions (selling your assets) to cover the debt, often locking in substantial losses.
Risk Management Takeaway: Never sell naked options until you are an experienced, well-capitalized trader who fully understands the unlimited risk involved. As a beginner, stick to covered calls and cash-secured puts, where your risk is defined and limited.
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