Chapter 5 | 2 min read
Option Buyer vs Seller
Introduction
Every option trade has two sides: a buyer and a seller. The seller is also called the writer. Understanding the difference is one of the most important lessons in options trading, because their risk and reward are completely different.
The Option Buyer
- Pays the premium.
- Gets a right, but has no obligation.
- Maximum loss = premium paid.
- Profit potential = large (unlimited for calls in theory).
- Needs the price to move in the right direction, enough, and quickly.
The Option Seller (Writer)
- Receives the premium.
- Has an obligation to buy or sell if the buyer exercises or the option ends in the money.
- Maximum profit = premium received.
- Loss can be very large.
- Must keep a large margin with the broker.
- Benefits from time decay and from prices staying in a range.
The Four Basic Positions
| Position | View | Max profit | Max loss |
| Buy call (long call) | Bullish | Large | Premium |
| Sell call (short call) | Not bullish | Premium | Very large |
| Buy put (long put) | Bearish | Large | Premium |
| Sell put (short put) | Not bearish | Premium | Large |
Example: Same Option, Two Sides (Illustrative)
Nifty is at 24,000. Ravi buys a 24,200 call at Rs 80 and Priya sells the same call at Rs 80. Lot size 65.
- Priya receives 80 x 65 = Rs 5,200 premium but must keep margin with her broker.
- Case 1: Nifty stays at 24,000 till expiry. The call expires worthless. Ravi loses Rs 5,200. Priya keeps Rs 5,200.
- Case 2: Nifty jumps to 24,600. The call is worth 400. Ravi gains (400 - 80) x 65 = Rs 20,800. Priya loses Rs 20,800.
Why Many Options Expire Worthless
Out-of-the-money options often expire worthless, which helps sellers. But when a big move comes, sellers can lose many months of profit in one day. Neither side is automatically better.
Which Side Should Beginners Start With?
Beginners should start with buying options in small quantities because the maximum loss is known. Option selling needs larger capital, strict risk control and experience.
On GoPocket
When you place an options order on the GoPocket app, a Buy order makes you the option buyer and a Sell order (without an existing position) makes you the option writer. Always check the margin required before selling options.
Key Takeaways
- Buyers pay premium and have limited risk.
- Sellers receive premium and take large risk with margin.
- Beginners should start by buying options with small size.
Disclaimer: Illustrative example. Option selling can lead to large losses.
