[paws]

Could you please explain more about who these counterparties are exactly? Do they include brokerages?

I'm trying to understand why a counterparty would enter into an arrangement where a stock price change obligates them to financial liability like this. Presumably there's some upside if the stock price goes the other way, but it's unclear who the $ would come from in that case.

Also: Who originates options? When someone buys an option, is it the brokerage who collects the fees? Is the counterparty already involved at that point?

[wallawe]

Let's say I own a bunch of SPLK and want to make some passive income. I am the counterparty to the call purchaser in this example.

I can sell call options 10% out of the money each week and make some nice cash. If my plan was to hold the stock long term, there's no downside risk because if the stock goes down, I get to keep the cash (premium) from selling the calls. If it goes sideways or slightly up I get to keep it as well.

The only "downside" is it goes up >10% in which case i've made that 10% + premium, but I've now had my stock taken away from me.

In this case, I lose out on an additional 10% in upside because it went up 20% overnight.

[0cf8612b2e1e]

That still seems like a pretty good deal. You missed out on capturing the entire upside, but lost no real money.

Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case. In the typical case, you can continue to collect those pennies.