A seller of a call option has the obligation to deliver a 100 shares of the underlying security. Usually sellers of a call option own 100 shares, and for each shares owned by a 100 multiple (200, 300, 400, etc.) they can sell that many call options contract(s). Someone who owns 350 shares of stock XYZ, in a 100X multiple they would be able to sell 3 contracts. The downside to selling calls is if the stock rises above the strike price, you will no longer make any money no matter how much the stock rises. You are obligated to sell your stock at the price, or buy back to call and keep your stock.

If the stock does happen to rise above your strike price, chances are that you made more money on the stock than you lost on the option, so it isn't always a bad thing.

The Straddle

why put on a straddle trade: When a trader thinks a large move is coming in a stock, whether it be up or down, but the trader isn’t sure which direction. A long straddle trade can be put on by buying a put and call both at the same strike and same expiration date.

What is a straddle: A straddle is an options trade where the trader buys a call and a put at the same strike price, and same expiration date.

How a trader benefits: One way to profit from this is that the price of the underlying security rises or drops very quickly. This will raise implied volatility and that increases the prices of the options.

Another way is when the stock moves up or down by the exact cost of the straddle. Let's say stock XYZ is trading for $150/share. The $150 call is for $2, and the $150 put is for $2. Together you will spend $4. You will need the stock to drop below$146 to break even, any move below $146 is your profit. On the upside you will need the stock to move $154 to break even, and any move above $154 will be profit.

Rises in implied volatility will increase the prices of these options. Let's say the stock does not move, but suddenly some event, such as earnings, a court case, or other corporate event suddenly occurs, this will raise the prices of these options. If the straddle costs $4, if the stock does absolutely nothing, volatility can raise the straddle to let's say $4.50, or even $5. Now you can sell it for $4.50 - $5.00 and pocket the difference.

What will work against you: A rise in volatility and a big move in the stock price will help you. The more volatility decreases that works against you. Volatility helps the trader who is long a straddle but decrease in volatility goes against the trader who is long a straddle. Time decay will also decrease the prices of options.

Any price moves in the stock and/or any increases in volatility will have to be greater than the options theta decay. Theta decay is the decay (the value the option loses) for the option, the longer an option sits on the market, the more it loses value as it gets closer to expiration.