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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.

  • 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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The Information on the Site is provided for information purposes only. The Information is not intended to be and does not constitute financial advice or any other advice. The trading of stocks, futures, commodities, index futures or any other securities has potential rewards, and it also has potential risks involved. Trading may not be suitable for all users of this Website. Past performance is not necessarily an indication of future performance. You absolutely must make your own decisions before acting on any information obtained from this Website.

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