Writing an OverUnder

Writing, or selling short, an OverUnder entails that an investor sells without previously owning what is to be sold (a negative holding). The advantage of writing is that you can utilize prices that you consider to be too high by selling the instrument in question in the hope of being able to buy back at a lower price on a later occasion. A reasonable and market-based price is attained by allowing anyone to write an OverUnder.

Investors writing an Over believe that the share will not close above the strike price. If the share on the expiration day does not close above the strike price, the writer may retain the sum yielded by the write (sale). If, however, the share closes above the strike price, the writer also in this case retains the sum yielded by the write (sale), but must pay 1 SEK per written unit to the buyer (this takes place automatically with no manual involvement from the buyer or the seller).

Investors writing an Under believe that the share will not close below the strike price. If the share on the expiration day does not close below the strike price, the writer may retain the sum yielded by the write (sale). If, however, the share closes under the strike price, the writer also in this case retains the sum yielded by the write (sale), but must also pay 1 SEK per written unit.

Writing example:
Assume that share A is traded at 53 SEK. An investor chooses to write (sell) 2,000 “Share A above 50” at a price of 0.60 SEK. This gives the writer a sales revenue of 1,200 SEK on the trade date.

If the share on the expiration day does not close above 50 SEK, the writer may retain the sales revenue. The profit from the investment will total 1,200 SEK.

If, however, the share closes above 50 SEK on the expiration day, the writer must pay 1 SEK per written unit. The total amount that the writer will have to pay in this case is 2,000 SEK, and the writer makes a loss of 1,200 – 2,000 = –800 SEK.

As the writer of an OverUnder, you risk losing a maximum of 1 SEK per written unit. In order for the exchange to ensure that a writer is able to pay any loss he or she may incur on the expiration day, a margin is calculated daily that is reserved in the writer’s account. In the vast majority of cases, the margin will be nearly 1 SEK per unit, although it may be less than this in certain cases. This means that the writer of an OverUnder risks losing more than the margin demanded by the exchange but never more than 1 SEK per unit less the sales revenue when written.

Consult your broker for more information regarding writing an OverUnder.