when a put writer is short the underlying stock the position is covered if there is a corresponding number of shares sold short in the account in the event that the short option closes in the money the short position offsets the loss of the written put 
in an uncovered position the writer must either buy shares at the strike price or buy the same option to close the position if the writer buys the shares the loss is the difference between the strike price and open market price minus the premium received if the writer closes the position by buying a put option to offset the sold option the loss is the premium paid to buy minus the premium received premium time valueoption writers pay especially close attention to time value the longer an option has until the expiration the greater its time value because there is a greater chance it could move into the money this possibility is of value to option buyers and so they will pay a higher premium for a similar option with a longer expiry than a shorter expiry time value decays as time passes which favors the option writer an out of the money option that trades for 5 has time value because the option has no intrinsic value and yet it still trades for 5 if an option writer sells this option they receive the 5 as time passes as long as that option stays out of the money the value of that option will deteriorate to 0 at expiration this allows the writer to keep the premium because they already received 5 and the option is now worth 0 and worthless once it expires out of the money as an option gets near to expiry the main determinant of its value is the underlying s price relative to the strike price if the option is in the money the option value will reflect the difference between the two prices if the option does expire in the money but the difference between the strike price and the underlying s price is only 3 the option seller still actually makes money because they received 5 and can buy back the position for 3 which is what the option will likely trade at near expiration example of writing a call option on a stockassume that apple inc aapl shares are trading at 210 a trader doesn t believe that the shares will rise above 220 within the next two months so they write a 220 strike price call option for 3 50 this means they receive 350 3 50 x 100 shares they will get to keep that 350 as long as the option expires in two months when the price of apple is below 220 the writer may already own shares of apple or they could buy 100 shares at 210 to create a covered call this protects them in case the stock shoots higher say to 230 if the writer sells the option uncovered and the price rises to 230 then the writer would have to buy shares at 230 to sell to the option buyer at 220 losing the writer 650 10 3 50 x 100 shares but if they owned the shares already they could just give them to the buyer at 220 make 1 000 on the share purchase 10 x 100 shares and still keep the 350 from the option sale the downside of the covered call is that if the share price drops they get to keep the 350 option premium but they now own shares which are falling in value if the shares fall to 190 the writer gets to keep the 3 50 per share from the option but loses 20 per share 2 000 on the shares they purchased at 210 losing 16 50 20 3 50 per share is better than losing the full 20 though which is what they would have lost if they bought the shares but didn t sell the option 