Overwriting is a practice in which someone sells a large number of options which are believed to be valued incorrectly. The goal of the overwriter is that the people who buy the options do not exercise them, allowing the overwriter to profit. If, on the other hand, the overwriter's strategy is not correct, she or he can run into trouble. This tactic is generally used by people with a great deal of experience in the options market, as well as access to funds or stocks to make good on the options in the event that they are exercised.
People who engage in overwriting can sell either call or put options. In a call option, the person who purchases the option has the right to buy stocks at a set price. Put options allow investors to sell stock at a set price. For the person selling the options, if the buyer fails to exercise the option, the seller pockets the price of the options contract and profits from the deal. Overwriting involves betting on an assumption that the options will not be exercised.
If someone believes that options are over or undervalued, overwriting may be used to capitalize on this mistaken value. Someone could, for example, sell overvalued call options or undervalued put options. The person purchasing the options also takes a gamble when buying the options. For example, someone may believe that a call option is not actually overvalued and buy the option with the intent of exercising it.
Options are traded heavily on markets and exchanges all over the world. There are a variety of investment strategies involving options and they come with varying degrees of risk. Trading in options requires familiarity with contracts, an understanding of how the market works, and an ability to make predictions about the direction in which the market is headed.
Speculating in options with activities like overwriting can be dangerous. One problem which can arise is that the speculator may not have enough funds or options to cover an options contract and be unable to access these resources when they are needed. While there are measures in place which are designed to prevent dangerous speculation, it can be difficult to control all aspects of the options trading community, and as a result people who are inexperienced or people who simply make the wrong decision, even with the benefit of experience, can flounder in the wake of a bad deal.
