Question

Knowing that option sellers have limited gain and unlimited loss, why there are many option writers willing to sell options?

Answer 1

Option sellers have limited gain and unlimited loss but there are a large number of options sellers who are active into the market because these option sellers are always shorting upon, out of the money options, so the probability of exercising of the out of the money options are very lower and hence these option sellers are having a higher probability of making money than losing money.

Stock market is always a game of probability and option sellers are trying to take high risk events in order to have a higher probability of making more money and lower probability of losing money but these losses are severe because these losses are always uncapped because they are unlimited in nature so option sellers will always try to sell out of the money options in order to maximize their rate of return and they are also trying to sell in the money option but they will be trying to cover their position because these option sellers are highly skilled traders who are having multiple positions which are hedging their overall exposes so any unfavourable movements are also hedged and hence these option sellers are having a very high probability of making more money so there are a large number of options sellers were active in the market because most of the strike price are maturing worthless at the time of the maturity because they can never be exercised.