Sell Call Options
By selling (writing) a call option, you
are selling the right to an option buyer to purchase the underlying stock
or index at a particular strike price. Option sellers (writers) have
obligations. Selling a call option requires a credit to be deposited. If
the option expires worthless, the credit is yours to keep. A trader who
sells call options believes that the market will fall.
To make money on a short call, the price
of the underlying security must stay below the call's strike price. The
profit is limited to the credit received from the sale of the call.
If the price of an underlying security
rises above the short call strike price, the option will be assigned to
an option holder, who may choose to exercise it. In other words, the
option seller must buy the underlying stock or index at the current price
and sell it at the call's lower strike price (Current price - strike
price = loss). When selling call options, the maximum loss is potentially
unlimited, because the underlying stock's upside is theoretically
infinite. This is why selling "naked" or unprotected call options (see
below) can be a high risk venture.
Selling Covered and Naked Calls:
If you own a stock, you can sell a call
on it and receive a premium. This is called writing a �covered call�.
If the stock declines in price, you keep the premium. If the stock
rises, the options buyer may exercise the option and demand that you
deliver the stock at the strike price. In this case, you give up your
stock, but get to keep the premium.
In a situation where you do not own the
underlying stock, you might still be able to sell a call on it (selling
naked calls), depending on your broker, trading experience, and
financial situation. By selling a naked call, you are in effect selling
an option on a stock that you do not own. If the stock goes down, you
keep the premium. If the stock goes up and the call buyer exercises his
or her right to purchase it at the strike price, you will first have to
buy the stock in order to be able to deliver it to the call buyer.
Naked call writing is associated with potentially unlimited losses � it
is the most aggressive and risky strategy an investor can use.
By selling a call option, you are selling the
right to buy the underlying stock or index at a particular strike price to an
option holder. Sellers have obligations. Selling a call option prompts the
deposit of a credit. You get to keep this credit if the option expires
worthless. A trader who sell call options believe that the market will fall.
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To make money on a short call, the price of the
security must stay below the call's strike price. The profit is limited to the
credit received from the sale of the call.
-
If the price of the security rises above the
short call strike price, it will be assigned to an option holder who may
choose to exercise it. Other words the option seller must buy the underlying
stock or index at the current price and sell it at the call's lower strike
price (current price - strike price = loss). The maximum loss is unlimited
to the upside, which is why selling "naked" or unprotected call options
comes with such a high risk.
Covered and not Covered Call:
If you owned a stock you can sell the call and
receive the premium. This is called writing a covered call. If the stock
declines in price you keep the premium. If the stock goes up in price the
options buyer exercise the option and demands that you deliver the stock at the
strike price. In this case you loose your stock but you keep the premium.
If you did not own the underlying stock you
still might sell a call. If the stock goes down you keep the premium. However,
if the stock goes up and the call buyer exercises the option you have to buy a
stock to deliver it to the call buyer. This this the
most aggressive and risky strategy an investor can use.
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