Do You Need 100 Shares to Sell Options?

Options trading involves financial instruments that offer investors strategies for managing risk and generating income. These instruments are agreements that derive their value from an underlying asset, such as a stock, exchange-traded fund, or index. Understanding options includes recognizing the contractual obligations and capital requirements associated with selling them.

Understanding Options Contracts

An options contract is a financial agreement that grants the buyer the right, but not the obligation, to either buy or sell an underlying asset at a predetermined price, known as the strike price, before or on a specific expiration date. The seller, or writer, of the option assumes the corresponding obligation to fulfill the contract if the buyer chooses to exercise their right. This exchange of rights and obligations occurs for a price called the premium, which the buyer pays to the seller.

There are two primary types of options: call options and put options. A call option provides the holder with the right to buy the underlying asset at the strike price. Conversely, a put option grants the holder the right to sell the underlying asset at the strike price. The premium for an option is influenced by factors such as the underlying asset’s price, the strike price, the time remaining until expiration, and market volatility.

The 100-Share Standard in Options

A common feature in the options market is that one options contract typically represents 100 shares of the underlying stock. This standardization ensures consistency and facilitates trading. For example, if an option’s premium is quoted at $2.00, the total cost for one contract would be $200, as it applies to 100 shares.

This standardized contract size means that financial obligations or rights from an options contract are tied to a block of 100 shares. This 100-share unit forms the basis for calculating profits, losses, and capital requirements. However, this standard does not mean an investor must own 100 shares to sell any type of option.

Selling Call Options

When selling call options, needing 100 shares relates to whether the position is “covered” or “uncovered.” A covered call strategy involves owning at least 100 shares of the underlying stock for each call option contract sold. For instance, if an investor owns 100 shares of a company, they can sell one call option contract against those shares.

In a covered call, the owned shares act as collateral, meaning the seller is obligated to sell their 100 shares at the strike price if the buyer exercises the option. This strategy generates income from the premium received, but it limits the potential profit if the stock price rises significantly above the strike price. Brokerage firms typically allow covered calls in standard investment accounts without requiring additional margin beyond the ownership of the underlying stock.

An uncovered, or naked, call involves selling a call option without owning the corresponding 100 shares of the underlying stock. This strategy carries substantial risk because the potential for losses is theoretically unlimited if the stock price rises sharply. If the option is exercised, the seller would be obligated to buy 100 shares at the higher market price to fulfill the contract, potentially incurring significant losses. Due to this elevated risk, selling uncovered calls typically requires a margin account and substantial collateral to be held with the brokerage firm.

Selling Put Options

Selling put options involves different requirements based on whether the position is cash-secured or uncovered. A cash-secured put involves selling a put option and simultaneously setting aside enough cash in a brokerage account to purchase 100 shares of the underlying stock at the strike price if the option is exercised. For example, if an investor sells a put option with a $50 strike price, they would need to have $5,000 (100 shares x $50) readily available.

This cash acts as collateral, ensuring the seller can fulfill their obligation to buy the shares if the stock price falls below the strike price and the option is assigned. The premium received from selling the put contributes to the overall return of the strategy. This approach is often used by investors who are willing to acquire the stock at a specific price and wish to earn income while waiting for a potential entry point.

Selling an uncovered, or naked, put means selling a put option without having the full cash equivalent to cover the potential purchase of the shares. While the maximum loss for a naked put is limited to the strike price multiplied by 100 shares (as a stock price cannot fall below zero), this strategy still involves considerable risk. Brokerage firms impose margin requirements for uncovered puts, which typically involve a percentage of the underlying value, plus the premium received, to cover potential obligations. These positions are generally reserved for experienced investors with appropriate account approvals and understanding of the associated risks.