The difference between Option buyer & option seller
| Parameters | Option Buyer | Option seller |
| Risk |
Buyer of an option has limited risk (to the extent premium paid)
|
An Option writer has unlimited risk |
| Reward |
An option buyer has unlimited profit potential
|
Option writer has limited profit potential (to the extent premium received) |
| Reward-to-risk ratio |
An option buyer has a high reward-to-risk ratio
|
Option writer has a low reward-to-risk ratio |
| Probability |
The probability for the option buyer to make money will be 10%
|
The probability for the option writer to make money will be 90% |
| Margin requirement |
The option buyer pays a premium to buy options
|
Option writer has to pay margin money (exposure and span margin), which will be the same as futures (as risk is unlimited like futures)
|
| Time Decay or theta |
Time decay works against an option buyer like an enemy
|
Time decay works in favor of an option seller like a friend |
| Market movement |
The market should be a sharp move for better profit or before expiry required sharp movement in our favor
|
If the market is in our direction good for us or market sideways then also good for us.
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