Option Buyers vs Sellers: The Real Truth Revealed

CA Manish Singh: 
Hello everyone. In the previous chapter we discussed option premiums. We saw that for every contract you always need one buyer and one seller. Options are no exception to that. 

We used an example where the buyer of the 25,450 call option paid a premium of ₹150 × 75 to buy one lot. If someone is buying, someone else must be selling. So, in this chapter we will understand: 

• Why does someone buy an option?
• Why does someone sell an option?
• Why selling requires much higher margin?
• How payoffs differ for buyers and sellers?
• And why option sellers exist despite theoretically having unlimited loss. 

Let us go to the screen and see how this plays out. 

Buying vs Selling: Margin Requirement 

On the screen you can see the option chain for 10 July, with the 25,450 strikes for both calls and puts. 

Call Option (25,450 CE) 

• Buying one lot requires ₹1,000 approximately.
• Selling the same option requires ₹12,000 margin. 

Put Option (25,450 PE) 

• Buying one lot requires ₹9,200 approximately.
• Selling it requires about ₹2.1 lakh margin. 

So, buying requires very small capital because your maximum loss is limited to the premium you pay. 
Selling requires very high margin because a seller's losses can theoretically be unlimited. 

This raises the important question: 
If buyers risk so little and sellers risk so much, why does anyone sell options at all? 

To understand that we must look at the payoff charts. 

Payoff Analysis: Why Buyers Buy 

Let us first explore the payoff of buying the 25,450-call option. 

Premium paid: ₹150 × 75 = ₹11,250 
(Exact platform numbers may vary slightly. In the example the maximum loss is shown as around ₹1,288 because the displayed premium was slightly lower at the time of recording.) 

Maximum loss = premium paid 
That is the most a buyer can lose. 

Now let us see when the buyer actually makes money. 

Current market price: 25,461 
Expiry date for this contract: 10 July 
Today’s date on the screen: 4 July 

If the market remains at 25,461 till expiry, the call buyer loses the entire premium because the option expires worthless. 
This is because time value decays each day and becomes zero on expiry. 

But buyers do not usually hold till expiry. They buy for short speculative moves. 

Example: 

If today itself the market rises to 25,500: 

• The premium may rise from ₹150 to ₹170 or ₹180.
• Even a small intraday move can give the buyer ₹1,500 – ₹2,000 profit. 

This is why speculators prefer buying. 
They only need a quick, small directional move to book profit. 

But if the same move happens 2–3 days later, the premium may not rise as much because time decay (theta) reduces option value every day. 

This is why holding long options for many days leads to losses even when price moves slightly in your favour. 

Payoff Analysis: Why Sellers Sell 

Now let us see the payoff of selling the 25,450 call. 

Maximum profit for the seller = premium received 
Example shown on screen: ₹1,128 approximately. 

But the seller starts losing money only after a certain point. 

Break-even point for call seller: 
Strike price + premium received 
= 25,450 + 150 = 25,600 

So the seller loses money only above 25,600, not before that. 

Why sellers love this? 

Because they earn profit if: 

• Market goes down
• Market stays sideways
• Market goes up slightly
• Market goes nowhere 

Buyers make money only if price moves strongly in their direction. 
Sellers make money most of the time unless a big directional move happens. 

That is why option sellers exist despite higher risk. 

Why Sellers Use Multi-Leg Strategies 

No experienced option seller sells only a call or only a put. 
They usually sell both sides to widen their safety range. 

Example from the screen: 

• Selling 25,450 CE
• Selling 25,450 PE 

Initial margin for selling call alone: ₹12,000 
Initial margin for selling put alone: ₹2.1 lakh 

Combined margin after selling both: ₹2.5 lakh 
So additional margin needed was only about ₹40,000. 

But look at the benefit: 

Premium collected from both sides: 

• Call premium: ₹150
• Put premium: ₹122 
  Total = ₹272 

This means the seller is safe as long as the market stays within a 272-point range up or down. 

Break-even now: 

• On the upside: 25,461 + 272 ≈ 25,733
• On the downside: 25,461 – 272 ≈ 25,189 

So the seller now has a very wide cushion of 272 points in either direction. 

This is why multi-leg option selling is popular. 
Margin requirement increases only slightly, but safety range expands massively. 

Why Buyers Rarely Buy Both Call and Put Together 

Suppose someone buys both the call and the put. 
Total premium paid = ₹150 + ₹122 = ₹272 

This means to break even, market must move more than 272 points in either direction. 

Such large movements are uncommon. 
So buying both sides generally results in loss unless there is a major event or extremely high volatility. 

This is why sellers dominate the options market. 

Summary: Buyers vs Sellers 

Option Buyer 

• Pays small premium
• Maximum loss is limited
• Needs strong directional move
• Profits only after break-even is crossed
• Suitable for short-term speculative trades 

Option Seller 

• Needs higher margin
• Maximum profit = premium received
• Loss starts only after break-even
• Makes money if market stays flat, moves slowly, or even drifts slightly
• Often sells both call and put to widen safety range
• Relies on time decay (theta) 

This is why both buyers and sellers exist and balance each other in the system. 

CA Manish Singh: 

That completes this chapter. 
In the next chapter we will discuss risk management for option sellers, because when we say “unlimited loss”, we must also understand how to restrict it. You should never expose your capital to unlimited risk. We will learn the tools to manage this. 

Disclaimer: Investments in securities markets are subject to market risks. Read all related documents carefully before investing.