Chances are that if you are a new investor your knowledge of stock options is limited to how one uses them to make a quick killing in the market via leverage. Buying puts and calls is known as going long, as one is betting on an increase in value of the put or call contract that you buy. Remember that since you buy calls when you believe that the value of a company’s shares will rise, and puts when you believe that its stock will fall in price, being long options has nothing to do with being optimistic or pessimistic regarding the direction that the stock will go.

The point in either case is that you have taken the buy side of the put or call transaction and so you are subject to all of the risks that entails, such as time value decay and the danger of your put or call contracts expiring worthless and out of the money.

The value of understanding this is that it leads to the question of who takes the other side of the options transaction i.e. the sell side. The answer to that would be anyone who would like to sell risk to a person taking a speculative position. If that sounds on the face of it a little bit like acting as “the house” at a casino, that is in fact exactly how the seller or the writer of a stock option functions in an options trade. And just as the house enjoys a much greater winning percentage over time, so do options sellers.

This gives us a fuller picture of how options trading works, and it should be clear to you that for every speculative trade that occurs on the options exchange in the form of a buyer taking a risky position, another person has taken a much more conservative position.

The sell side of the transaction has everything that the buy side does not have: the option seller actually benefits from the time decay in options premiums that slowly eat away at the value of the option buyer’s contracts. The option seller stands no chance of making 300% or similar astronomical amounts on a given position. Instead he is quite happy with maybe 5% to 15% return over a few months. And while the auctions buyer in all likelihood points to a winning percentage of well under 50%, prudent writers of options contracts might achieve a 90% success rate, depending on just how conservative are the options positions that they enter.

Generally options trading is quite risky and it behooves you to get stock options adequately explained to you before entering into either buying them or selling them. At the same time you should know that most professionals and savvy options traders use option selling as a much more reliable way of increasing overall investment returns.