Writing options profitable?

Writing options fall into two categories. Covered and Uncovered, either way the position is considered short. The option can be covered by a position in the underlying security or by another option. The uncovered option writer assumes a great deal of risk generally for small profit.
Covered with a position in the underlying.
Covered Call writing or "Buy Writes" One owns the underlying security to make delivery if the calls are assigned. The options are either In-the-Money, (ITM) the strike is below the current market price of the underlying, At-the-Money, (ATM) the underlying price and the exercise price are the same, or Out-of-the-Money, (OTM) the strike is above the price of the underlying. The ITM option offer the greatest amount of downside protection but the maximum profit potential is the time premium. ATM calls offer good downside but again only time premium as profit. OTM options allow greater upside potential on the stock but provide smaller premiums and thus a smaller hedge on the stock. There is no right or wrong in the selection of strike price. Personally, I will tend to write OTM calls during bullish market conditions. The premiums are better and the stock has a better chance of being called. The average returns are around 16% to 18% annualized. In neutral to bear markets I'll write calls ITM, and be happy with 10% to 12% returns. Writing covered call also makes for a good exit strategy or a method to augment dividends. Example: One of the few times I didn't sell the option at the same time. I bought @ 7.62 with a price target of $20. 14 months later the stock was @ 19 and change, so I sold the 20 calls. In effect I was paid another 2 points to sell the stock @ 20 where I wanted to in the first place. I have also used selling call options to augment dividend income. The stock is a large cap boring, but good dividend paying. I sell far OTM options about every 4 months. The stock dividend alone is about 4.20% but with the option income the annualized yield is increased to 8% to 10%.
Covered with another Option. The option buyer has the enemy of time, as each day passes the time premium in the option will decay. For the option writer time is now your ally. The only thing I know of that is guaranteed in the market is the passage of time. Credit spreads make great use of time decay. Credit Call spreads are neutral to bearish, credit Put spreads are neutral to bullish. Example: The stock is @ 64.91 and over the last 6 months has struggled above 70 unable to crack 75. Heading into the summer doldrums. Write the June 75 calls @ 3.30 and buy the June 80s for 2.10. The result is a credit of $1.20. The spread is 5 points. If one was the put on the position for 10 contracts on each side the capital requirement would be $5,000 less the credit of $1,200. If as anticipated the stock does nothing and both options expire worthless, one has a profit of $1,200 from a $3,800 investment, or 31.5% from now till June 19th. The breakeven point would be 76.20, maximum loss is the $3,800. Selling the 80s and buy the 85s put the trader even further away and requires the stock to have an even bigger rally to cause trouble. The tradeoff is the credit is .75 so the loss the capital required is higher and the profit percent is lower. The credit put spread is basically the same with stocks that are showing support at some level.

Well noob, you can probably tell by Zrdoz's re[ply, writing options is very involved, and probably not for anyone that has to ask about it on a forum.

You are correct that those writing , (or selling the option), are the ones making money, not the ones that buy the options.

You will also need to be approved for options writing because of the margin requirements.

The approval criteria to write options are based on your collateral (cash in your account), your trading experience, your trading objectives, and the level of risk you're willing to take.

How wise would it be to buy 100 shares of FAZ and write a SELL TO OPEN option say like Oct 10 18.00 call for around 3.50? What would be the downside risk? Could I buy a April 10 16.00 PUT at .89 for insurance? THANKS.

Many advisory services that only sell options will tout this statistic. While it may actually be true, it may be for reasons not so readily apparent. Here's how I see it;

• Option buyers range from the absolute beginner to the seasoned professional
• Option sellers typically have a little more experience
• Experienced traders, on average, are more successful than those less experienced

So if most beginning option traders are buying, and a larger percentage of experienced traders are selling, the odds may just favor the sellers... but I wouldn't go so far as to say that all the sellers win and all the buyers lose.

As far as mechanics, selling is basically the same as buying; you enter an order to open the trade, and you enter an order to close the trade... the difference is you Sell To Open (vs Buy To Open), and you Buy To Close (vs Sell To Close).

Zardoz, Florida, and Pete already gave some great detail, but there are still plenty of others to consider, such as Risk Profile, Rights vs Obligations, etc. As with all trading and investing, the participant must be fully aware of all potential outcomes if there is to be any expectation of success.