Writing a call option. Say the underlying security is trading at $100. You write a call option with a strike of $110, 3 month expiration and sell it for $10. I

Writing a call option. Say the underlying security is trading at $100. You write a call option with a strike of $110, 3 month expiration and sell it for $10. If the underlying never goes above $115 in those 3 months you make money. If it discovers the cure for cancer and gets a hostile takeover offer sending the price to $5000 well then you're out $4885. An experienced options trader will limit their potential loss in this situation by say buying a call at $150 for $1. There are lots of examples like this. Warren Buffett once likened this to picking up pennies in front of a bulldozer.