Buying options
The most a buyer can lose is the premium paid. That can be 100% of it, and it happens often: an option that is out of the money at expiration expires worthless. A buyer's profit potential on a call is large, on a put it is capped at the stock going to zero.
Selling options
The seller collects the premium up front but takes on the obligation. The risk is much larger than the premium.
- Short (naked) call: loss is theoretically unlimited, since the stock has no ceiling.
- Short (naked) put: loss can be up to the strike times 100, less the premium, if the stock goes to zero.
- Covered call: selling a call against 100 shares you own. Your upside is capped at the strike. You still have the risk of the shares falling.
- Cash-secured put: selling a put while holding enough cash to buy the shares. You must be willing to own them at the strike.
Assignment
A seller can be assigned at any time on American-style options. After assignment, a short call means selling 100 shares at the strike, and a short put means buying 100 shares.
Approval levels
Brokers grant option permissions in levels. Selling uncovered options requires higher approval and margin, because the risk is larger.
Which side is better?
Neither. Buyers pay for time decay and need the move to happen. Sellers get paid for time decay but take on the large, sometimes sudden losses. Know which side of the trade you are on before you place it.
Education only, not investment advice. Trading involves real risk of loss, including loss of everything you put in. See the full disclaimer.