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Options Trading Strategy:
Selling Call Options Short

Selling calls or puts are not the most popular options trading strategies among retail traders. There are certain margin requirements a trader has to meet for this type of trading.

If an options trader is expecting the market to go down he/she can sell calls with expectations to profit from a bearish movement. By selling call options, a trader sells the right to other trader to buy an asset at a specific price (the strike price), on or before a specific date (the expiration date). By selling call options, a trader receives a premium. If the price of the underlying stock goes down, the call price goes down and a call seller can buy calls to cover the position at lower price and profit from the difference in the received premium and the current price. If the price of the underlying stock goes up, the call price goes up and the call option seller may experience losses.

For example, if you sell short QQQQ options call at $2.00 and the next day QQQQ stock drops by 1%, the calls you have sold may drop in value by 20%. You may then decide to buy the calls to cover your position and fix a 20% profit, or if your view on the market is still strongly bearish you may decide to wait and buy the calls later (cover your position), in expectation of bigger profits. On the other hand, if after buying QQQQ call options the QQQQ stock goes up, then the value of the bought call options will increase.

The positive aspect is that time plays on the hand of the option seller. Even if the market moves flat, the value of the calls may drop within a couple of days. Options loose their value with time - the closer they are to the expiration the cheaper they become.

The maximum loss a call options seller may experience is unlimited. The maximum profit is a premium received for sold calls if they expire worthless.

Depending on the trading style and risk tolerance, an options seller may chose to sell short different types of calls options that may vary by strike and expiration. The most traded options are nearest at the money call options. The deep in the money call options are considered more risky to sell snort; however, they are more expensive and a trader who sells deep in the money calls receives a bigger premium. Selling short cheaper (out of the money) call options are considered less risky and cheaper (more out the money) they are a bigger move in the underlying stock, which is required to trigger changes in the call price and there are more chances they expire worthless.

There are two types of selling calls short. Selling call options on the stock that is owned by a trader called "covered call writing" or selling covered calls. The covered calls have limited risk. A trader sells naked calls (uncovered calls) when he/she is selling calls on the stock that he/she does not own and the involved risk is theoretically unlimited in this case, even though the profits are limited. As a rule to sell naked options (uncovered options selling) a trader has to meet certain margin requirement set by a broker.

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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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