The risks from buying options (if you decide not to sell them before expiration) are that they will expire worthless, assuming they are out-of-the-money. On expiry, if the option is ITM by 0.01 or more it will be auto-exercise by the OCC. Post auto-exercise, the underlying stock price may have drastic price movement during extended hours trading which in normal circumstances warrant the position to be OTM. As such, positions delivered/taken delivery may experience a loss instead even though auto-exercise is ITM.
Aside from buying options, many investors get excited about selling options because they get paid upfront for their trades.
Investors that sell short puts and covered calls are taking on specific risks. In the case of a cash secured put write, you risk being put stock, which we mentioned above. Let’s look at the Microsoft (MSFT) December 21st $110 Put Write, which expired in-the-money, again.
If we sold one contract, we would be required to purchase 100 shares for $110 per share at expiration, costing $11,000. Every put write carries the risk of exercise. However, this is unlikely to happen, hence selling too many options that expire in the money can be costly.
In the case of a covered call strategy, the risk is the buyer will call your stock away.
Assuming you bought 100 shares of Microsoft for $110 per share, your invested capital is $11,000. You decided to engage in a covered call strategy. If your covered call expires in-the-money, you would have been required to sell your 100 shares for $100. The buyer would have paid $10,000, resulting in loss in money on our trade. But of course, you still keep the premium from the selling of the call option.
When selling covered calls, you risk losing money from your stock position at times.