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i am new to corporate finance and ask myself why a investor is interested in being short on a Option? The only he can win is a premium but he can loose much more. I understand with being a short I can cap the profits on a Stock like this: enter image description here

But I think this is a quite theoretical case, right? I'd like to understand the possible benefits in practice

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for hedging risk –  pyCthon Aug 1 '12 at 16:53
    
according to academia, option writers are "risk adverse" while option buyers are "risk seeking" –  user5462 Jun 4 '13 at 3:18

4 Answers 4

Sometimes those limited risk position are too expensive and will only profit under extreme conditions. On average, you should always add short gamma to your position.

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Well, I would say this: Shorting options is like picking pennies from a hot manhole. You may get lucky once, twice, xx times but one day you'll get burned and the recurring reward may not cover the recovery expences. So, the short answer is - The benefit from shorting options is very risky. This is based on my backtesting experience using oscreener tool.

Hope this helps in your research.

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As a complement to chrisaycock's answer, I would also say that shorting options is useful when you want to create option strategies. Buying and shorting options on the same underlying with different strike prices allows the investor to create products with elaborate payoff which allows them to be more on a range of the underlying's price rather than on its direction.

Well known examples are:

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Market makers, obviously, have to be willing to short an option. They will delta hedge their positions to limit risk.

As for investors, they can aim for a buy-write strategy to collect extra income in lieu of unlimited upside.

And lastly, someone who owns a stock he can't sell right away (such as an entrepreneur still under a vesting period after his firm has been acquired) can limit the price range by creating a collar. The income from selling the call will offset the cost of buying the put.

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