how overwriting works
overwriting is a speculative strategy that some option writers may employ to collect a premium even when they believe the underlying security is incorrectly valued hoping that they do not get assigned the short options investors may also refer to the strategy as overriding the writer seller of an option has an obligation to deliver their shares to the buyer if the buyer decides to exercise the option while the holder buyer of an option has the right but not the obligation to purchase the seller s shares at a specific price within a specified time overwriting is a technique used by speculative option writers in an attempt to profit from the premiums paid by option buyers for option contracts the writer hopes will expire without being exercised overwriting is considered risky and should only be attempted by investors who have a comprehensive understanding of options and options strategies overwriting can help investors who hold a dividend paying stock to increase their income by collecting the premium they receive from writing an option against the stock they own for example if they currently receive a 3 dividend yield they could increase that yield to effectively more than 10 by overwriting the strategy is most effective when stock prices have had a sharp decline and premiums get overvalued as the higher premiums help offset possible further losses the downside risk to overwriting is that if the stock s price rises sharply the seller loses any profit they would have made above the options strike price to combat this the seller may want to buy the option back although they would most likely need to repurchase it at a higher price than what they sold it for overwriting examplesuppose an investor holds a stock that is trading at 50 they decide to write a 60 call option against it that expires in three months and they receive a 5 premium the buyer will likely exercise the call option if the stock is trading above 60 before the expiry date which limits the seller s profit to 15 a share the difference between 50 and 60 plus the 5 premium on an asset that may continue to rise in value this is why the seller hopes that the call option will expire worthless they get to keep the premium already collected and continue to hold an asset that is on the rise if the stock declines the 5 premium the seller received helps to partially offset any loss incurred 