the option buyer has unlimited profit potential then the option seller potentially

has unlimited risk

o The breakeven point is the point at which the option buyer starts to make money,

this is the exact same point at which the option writer starts to lose money

o If option buyer is making Rs.X in profit, then it implies the option seller is making a

loss of Rs.X

o If the option buyer is losing Rs.X, then it implies the option seller is making Rs.X in

profits

o Lastly if the option buyer is of the opinion that the market price will increase (above

the strike price to be particular) then the option seller would be of the opinion that

the market will stay at or below the strike price…and vice versa.

To appreciate these points further it would make sense to take a look at the Call

Option from the seller’s perspective, which is the objective of this chapter.

Before we proceed, I have to warn you something about this chapter – since there is

P&L symmetry between the option seller and the buyer, the discussion going

forward in this chapter will look very similar to the discussion we just had in the

previous chapter, hence there is a possibility that you could just skim through the

chapter. Please don’t do that, I would suggest you stay alert to notice the subtle

difference and the huge impact it has on the P&L of the call option writer.

4.2 – Call option seller and his thought process

Recall the ‘Ajay-Venu’ real estate example from chapter 1 – we discussed 3 possible

scenarios that would take the agreement to a logical conclusion –

1. The price of the land moves above Rs.500,000 (good for Ajay – option buyer)

2. The price stays flat at Rs.500,000 (good for Venu – option seller)

3. The price moves lower than Rs.500,000 (good for Venu – option seller)

If you notice, the option buyer has a statistical disadvantage when he buys options

– only 1 possible scenario out of the three benefits the option buyer. In other words

2 out of the 3 scenarios benefit the option seller. This is just one of the incentives

for the option writer to sell options. Besides this natural statistical edge, if the
option seller also has a good market insight then the chances of the option seller

being profitable are quite high.

Please do note, I’m only talking about a natural statistical edge here and by no way

am I suggesting that an option seller will always make money.

Anyway let us now take up the same ‘Bajaj Auto’ example we took up in the previous

chapter and build a case for a call option seller and understand how he would view

the same situation. Allow me repost the chart –