Option Writer

The intuition

Options are not minted by the exchange; they come into existence when one trader agrees to sell what another wants to buy. The seller is the writer. A writer of a 24,500 Nifty call is paid now to promise that, if the index settles above 24,500 at expiry, they will pay the difference. If it settles below, the promise expires unused and the premium is kept. Most options expire out of the money, so most writers keep most premiums, which is the lure. The catch is the size of the payment when the promise is called: for a call it has no ceiling.

The writer’s business is therefore insurance. Small, regular income; rare, large claims; and a solvency requirement, margin, enforced daily by the clearing corporation. The skill is not in collecting premium, which is automatic, but in choosing strikes the market will not reach and surviving the weeks when it does.

Formula

Short call P&L at expiry = premium − max(settlement − strike, 0), per unit

Short put P&L at expiry = premium − max(strike − settlement, 0), per unit

Writer’s Greeks: the negatives of the buyer’s. Short options have negative gamma (losses accelerate against them), positive theta (they earn each day) and negative vega (they lose when implied volatility rises).

Worked example (illustrative numbers)

Suppose NIFTY is at 24,000 with 30 days to the monthly expiry and implied volatility near 13%. A writer sells one lot (65 units) of the 24,500 call for ₹205, receiving ₹13,325, and posts margin of about ₹1,15,000 (illustrative; the broker’s calculator gives the live figure).

Nifty at expiry	Call worth	Writer’s P&L per lot
23,500	0	+₹13,325
24,500	0	+₹13,325 (maximum)
24,705	205	0 (break-even)
25,000	500	−₹19,175
25,500	1,000	−₹51,675

A 2.1% rise to 24,500 still leaves the writer with the full premium; a 6.25% rise to 25,500 costs nearly four months of such premiums. Before expiry the exposure is sharper. If Nifty jumps 300 points in a week with IV rising to 16%, the 24,500 call could trade near ₹340, a mark-to-market loss of about ₹8,800 per lot on an option that is still out of the money, with the margin requirement rising at the same time.

Why it matters to an options trader

• Writers build the walls on the chain. Large open interest at a strike is mostly written positions; the writers’ strikes become the support and resistance the market trades around, and their hedging reinforces it.
• Writers set the premium you pay. Implied volatility is the price at which writers are willing to take on the obligation; it rises when they are nervous and falls when they are comfortable.
• Writers are paid by the clock. Theta is their income; the buyer’s theta decay is the writer’s credit, day by day.
• Writers drive expiry-day behaviour. Defending a strike into the last half-hour, and the unwinding when a strike breaks, are writer actions, which is why max pain is a writer-centred idea.

Common mistakes

• Measuring success by win rate. A writer who wins nine months in ten and loses a year of premium in the tenth has a negative result.
• Writing naked calls on a stock before results. Gaps through the strike on earnings are the classic writer loss.
• Ignoring vega. A written option loses on a volatility spike with no price move at all.
• Under-margining. The requirement rises as the trade goes wrong; the margin at entry is the minimum, not the budget.
• Forgetting stock delivery. A written stock option that finishes in the money on NSE delivers or demands shares at the strike.

Indian-market specifics

• NSE index and stock options are European: a writer can be assigned only at expiry, automatically, for in-the-money contracts. There is no early assignment (SEBI circular on European-style stock options, 2010).
• Index options settle in cash at the underlying’s closing value on expiry day; stock options that finish in the money are physically settled, so a stock-option writer must deliver or take delivery of shares.
• Margin: SPAN plus exposure, collected upfront under SEBI’s peak-margin rules, with the premium received credited; short index options carry an additional 2% extreme loss margin on expiry day from November 2024.
• Securities Transaction Tax is paid by the writer on the premium when the option is sold (0.15% of premium from 1 April 2026); the exercise-side STT at expiry is paid by the holder.
• Expiry days: Nifty weekly and monthly on Tuesday; Bank Nifty, FinNifty and Midcap Select monthly on the last Tuesday; Sensex on Thursday on BSE; holidays move expiry to the previous trading day. Lot sizes: Nifty 65, Bank Nifty 30, FinNifty 60, Sensex 20.

FAQ

What does an option writer earn?

The premium, kept in full if the option expires worthless.

What is the maximum loss for an option writer?

Unlimited on calls; strike minus premium on puts.

Can an option writer be assigned before expiry on NSE?

No; NSE options are European and assign only at expiry.

How much margin does an option writer need?

SPAN plus exposure, upfront, rising with adverse moves and volatility.

Related terms

• Option Buyer, the other side
• Short Put, the most common written position
• Assignment, what happens to the writer at expiry
• Theta, the writer’s income