Aggressive investors in the options market aim to profit in two primary ways. First, they can benefit from an increase in the value of the option itself. For example, if the price of a stock is rising, the holder of a call option might sell it to another investor at a higher price than initially paid. Second, investors can exercise the option at the strike price, take ownership of the underlying securities, and then sell them at a profit.
Investors take on a particularly speculative position when they do not own the underlying asset, such as when they sell naked calls or naked puts. Option traders can suffer significant losses. For instance, the writer of a put option may incur a loss if the market price of the underlying asset drops below the strike price. In this scenario, the writer would be forced to buy the asset from the option holder at a price higher than the current market price. Writing naked options is a high-risk strategy.
Selling a call option without owning the underlying asset.
Selling a put option without having the cash to purchase the underlying asset if the option is exercised.