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
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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