Overwriting

What Is Overwriting?

Overwriting is a trading strategy that includes selling options that are accepted to be overpriced, with the assumption that the options will not get exercised before they lapse.

How Overwriting Works

Overwriting is a speculative strategy that some option writers might utilize to collect a premium in any event, when they accept the underlying security is erroneously valued, trusting that they don't get assigned the short options. Investors may likewise allude to the strategy as "superseding."

The writer (seller) of an option has an obligation to deliver their shares to the buyer on the off chance that the buyer chooses to exercise the option, while the holder/buyer of an option has the right however not the obligation to purchase the seller's shares at a specific price inside a predetermined time. Overwriting is a technique involved by speculative option writers trying to profit from the premiums paid by option buyers for option gets the writer expectations will lapse without being exercised. Overwriting is viewed as risky and ought to just be endeavored by investors who have a complete comprehension of options and options strategies.

Overwriting can assist investors who hold a dividend-paying with stocking to increase their income by collecting the premium they receive from composing an option against the stock they own. For instance, assuming they at present receive a 3% dividend yield, they could increase that yield to effectively over 10% by overwriting. The strategy is best when stock prices have had a sharp decline and premiums get overvalued, as the higher premiums assist with offsetting conceivable further losses.

The downside risk to overwriting is that assuming the stock's price rises strongly, the seller loses any profit they would have made over the options strike price. To combat this, the seller might need to buy the option back, despite the fact that they would probably have to repurchase it at a higher price than what they sold it for.

Overwriting Example

Assume an investor holds a stock that is trading at $50. They choose to compose a $60 call option against it that lapses in 90 days and they receive a $5 premium. The buyer will probably exercise the call option in the event that the stock is trading above $60 before the expiry date, which limits the seller's profit to $15 a share (the difference somewhere in the range of $50 and $60, plus the $5 premium) on an asset that might keep on ascending in value. To this end the seller trusts that the call option will lapse useless — they get to keep the premium previously collected AND keep on holding an asset that is on the rise. If the stock declines, the $5 premium the seller received serves to some degree offset any misfortune incurred.

Features

• Overwriting is utilized to produce extra income, particularly with options written on dividend-paying stocks.
• Overwriting is a strategy to sell (compose) options that are overpriced under the assumption that the options will not get exercised.
• Overwriting is viewed as risky and ought to just be endeavored by investors who have a far reaching comprehension of options and options strategies.