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The Option Chain of a stock is given below. The stock price now is $22.50.

If I sell a $21 put, I'll receive a premium of 15 cents and I will be obligated to buy the stock at $21 if it is below $21 at expiration. If the stock is above $21 at expiration, I will keep $15.

If I sell a $24 call, I'll receive a premium of 20 cents and I will be obligated to sell the stock at $24 if it is above $24 at expiration. If the stock is beow $24 at expiration, I will keep $20.

How do I interpret this and how does the collection of the premium work?

enter image description here

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    If you are trading at the market, when you sell an option, it's at the bid. You used the ask prices. When selling naked options, most of the time you eat like a bird and occasionally you sh*t like an elephant. Avoid naked options unless you are not only very experienced with options but you practice disciplined risk management as well. – Bob Baerker Dec 8 '19 at 13:46
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    The family friendly expression is "picking up pennies in front of a steamroller". For many older folk, pooping like an elephant actually seems a worthy goal. – JTP - Apologise to Monica Dec 8 '19 at 13:49
  • If you sell an option, you collect a premium upfront in any case. All that does is shift the payout of the option up (or down if you buy). – D Stanley Dec 8 '19 at 15:05
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    So what you're effectively saying JTP is that selling naked options is the Metamucil Strategy? :->) – Bob Baerker Dec 8 '19 at 16:23
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enter image description here

Red - the 15 cents you collect by selling the put. You lose, penny for penny if the stock drops below $21. I am assuming expiration, not movement and getting out of one leg or both, early.

Green - the 20 cents you sold the call for. You lose, penny for penny as the stock rises above $24.

Purple - the net profit/loss for the entire trade. You profit a potential 35 cents for the $21-$24 range. Break even at $20.65 or $24.35 on prices up/down. Outside of that range, you have unlimited risk. If the stock jumps to, say $124.35, you are out $10K. Compared to the $35 you got from selling this set of options.

(Note, the graph is just Desmos nothing special. I'm a math guy and use it for graphing.

Edit to add the graph of returns for the alternate scenario OP offered. I had only read the initial premise. The result is the same risk/reward, within a nickel.

enter image description here

  • Could you please answer the questions on (1) SELL PUT at the strike price of $24 (2) SELL CALL at the strike price of $21 also. Graph is not necessary. – wonderful world Dec 8 '19 at 13:47
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    Done. Actually tougher for me to articulate sans graph. – JTP - Apologise to Monica Dec 8 '19 at 13:52

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