What is shorting/writing/selling in Options trading?

Most traders buy Call and Put options. They buy call when they expect the market to go up and buy Put when they expect the market to go down. However, there is another interesting trade which is risky and is done by few traders. It’s called shorting or writing or selling Options.

In Option writing/shorting/selling, you sell a Call or Put option hoping that its price will go down and be resulting in profits for you. With a majority of Options traders buying options and a significant part of those trades expiring worthless, the probability of loss or less profit is more. Now when a majority of traders are losing then who’s gaining. It's the traders on another side i.e. sellers.

The time value also works in the favor of sellers while it works against buyers. With each passing days, if the market doesn’t move or falls, he is gaining. We all know Premium= Intrinsic Value + Time Value. So, if the intrinsic value doesn’t move then the seller is at an advantage as each passing day reduces the price of the premium.

An Option buyer has the limited loss, unlimited risk potential whereas for a seller it is the unlimited loss or bigger profit. Let’s understand this with an example;