[Discuss Thrower]

Remember an option on an equity is the right but not obligation to exercise the option at that agreed upon strike price.

The value of an option depends on the market price of the underlying during the life of the option (Euro options can only be exercised at the contract expiry date, American can be exercised anytime).

Now, if you're buying an option you're buying that right but not obligation to exercise that contract and acquire the underlying security at the strike price.

Say it's Thursday and you have a call expiring on Friday. This call strike price is $110. If GE ends the day of trading above $110, then your option has value (ignoring commissions, of course) to either exercise the option and buy the stock at the strike price or just sell the option to another party. If it's trading below $110, then you $110 strike price option is worthless.

Basically, you are coming out ahead of a trader who thought GE would not exceed $110 a share on Friday.

If you have purchased a put with a $90 strike with the same expiry and underlying equity, then it's kind of the reverse. If GE closes above $90, your put has no value and presents no profit. If GE closes under $90, it has value and can be sold for a profit (or exercised). You are coming out ahead based on a Trader who thought GE would not go below $90 a share.

The value to you depends on this in generalized math: Strike Price - Stock Price = profit if you have purchased a call and Stock - Strike = profit if you have purchased a put

BUT if you're selling an option (you are writing an option) the dynamic is reversed. If you sell a $110 GE call and GE trades at $110 or more in the market, you have to pay the costs to fulfill the contract and provide GE stock to the option buyer and sell it to the option buyer at $110 even thought the stock is trading for potentially $150 in the market.

Writing a naked put at $90 and GE goes lower than $90, then you incur unlimited loss potential from fulfilling that contract.

Your only upside in writing a naked put is if the underlying stock doesn't fall below the strike price and your profit is capped at the premium you receive for selling that put.