When Do You Get Premium
When You Write An Option?

Question - When Do You Get Premium When You Write an Option?

Answer

This issue sometimes confuses those new to options.

The short answer is that you get the premium immediately upon the successful execution of your option order or trade. That doesn't mean, however, that you're immediately profitable.

On the contrary, along with the addition of cash in your brokerage account, you also now have a short option position (or credit spread) that essentially functions as a liability. It's only when the short option/credit spread expires worthless (or you close it early) that the transaction is finally closed and you can officially book your profit.

Here's a quick example to illustrate (commissions excluded for simplicity):

The XYZ Zipper Company is trading at $20.50/share. You sell, or write, a single naked put expiring in one month at the $20/strike price for $1/contract in premium. Excluding commissions, that results in a $100 cash deposit (1 contract = 100 shares) into your brokerage account.

In exchange, the short put obligates you to purchase 100 shares of the underlying stock at the $20/strike price should the buyer of the put exercise the option (i.e. if the stock closed below $20/share at expiration).

Yes, you have an extra $100 in your cash balance, but you also now have a short put with a negative value in your account. This negative value is what it would cost you to close the position (buy to close).

Presumably, right at first (and factoring out commissions and the bid-ask spread), this would roughly be the same amount that you received when you first opened the position (sell to open).

Assuming that the trade works out in your favor and the underlying stock either moves higher or at least continues to trade at or above $20/share, the value of the put will steadily erode (as will your corresponding liability) until it expires completely worthless on the expiration date.

It's only at this point that the premium you received immediately upon opening the trade is yours free and clear.

And for a cool way to track and evaluate your trading results, check out this page on one of my favorite metrics - calculating annualized option returns.