Important thing about writing option

In my option trade with HSB, I am writing a Put option. As I have said before, for option writer the risk is unlimited. So as a writer, we need to be aware of the risk involve. The worse case scenario for writing put option is when the option was exercise and you will need to have enough money to buy that share at that predetermine strike price. Therefore for every put option I write, I always had enough cash for cover my position if I get exercise. This is called Cash covered Put writing. Which means I have enough cash to cover my exposure. For example, if I write 1 contract of HSB Put option with strike price of $110. And each contract cover 100 shares. Then I will have at least 110*100 = $11000 in my account to cover my position if I get exercised. The option broker will also require you to have some cash to cover margin requirement for the position. So for every stock that I write put option on, it is a stock that I don't mind buying at that certain strike price. I only write put option on stock that I would love to buy. My rule for writing Put option is to always have enough cash to cover my exposure. If I don't have enough cash, i will write less contract or give up the trade all together.


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