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Selling Call Options

You are selling the right to an options buyer to purchase the underlying stock or index at a particular strike price, by selling (writing) a call options. Option sellers (writers) have obligations. Credit needs to be deposited in order to sell a call option. The credit is yours to keep, if the option expires worthless. A trader who sells call options believes that the market will fall.

The price of the underlying security must stay below the call’s strike price, in order to make money on a short call. From the sale of the call, the profit is limited to the credit received.

The option will be assigned to an option holder, who may choose to exercise it , if the price of an underlying security rises above the short call price. The option seller, in other words, 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 potentially unlimited, because the underlying stock’s upside is theoretically infinite, when selling call options. This is why selling “naked” or unprotected call options (see below) can be a high risk venture.

Selling Covered and Naked Calls:

You can sell a call on a stock and receive a premium, if you own a stock. This is called writing a “covered call”. You keep the premium, if the stock declines in price. The options buyer may exercise the option and demand that you deliver the stock at the strike price, if the stock rises. You give up your stock, in this case, but you get to keep the premium.

You might still be able to sell a call on an underlying stock (selling naked calls), depending on your broker, trading experience, and financial situation, in a situation where you do not own an underlying stock. You are in effect selling an option on a stock that you do not own, by selling a naked call. You keep the premium, if the stock goes down. The call buyer exercises his or her right to purchase the stock at the strike price, if the stock goes up but you will first have to buy the stock in order to be able to deliver it to the call buyer. The most aggressive and risky strategy an investor can use, is the naked call writing which is associated with potentially unlimited losses.

You are selling the right to buy the underlying stock or index at a particular strike price to an option holder, by selling a call option. Sellers have obligations. Deposit of a credit is prompted when selling a call option. IF the option expires worthless, you get to keep this credit. A trader who sells call options believes that the market will fall.

• The price of the security must stay below the call’s strike price, in order to make money on a short call. The profit is limited to the credit received from the sale of the call.

• An option holder may choose to exercise the security, if the price of the security rises above the short call strike price. 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), in other words.

Covered and not Covered Call:

You can sell the call and receive the premium if you owned the stock. This is called writing a covered call. You keep the premium, if the stock declines. The options buyer exercises the option and demands that you deliver the stock at the strike price, if the stock goes up in price. You loose your stock but you keep the premium, in this case.

You still might sell a call, if you did not own the underlying stock. You keep the premium if the stock goes down. If the stock goes up, however, the call buyer exercises the option you have to buy a stock to deliver it to the call buyer. This is the most aggressive and risky strategy an investor can use.

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