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Why Sell Call Options.
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.
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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. |
