Selling call options strategy

If the stock price is below the strike price at expiration, then the call is out of the money and expires worthless.

The call seller keeps any premium received for the option. While the option may be in the money at expiration, the trader may not have made a profit. Only above that level does the call buyer make money. When comparing in percentage terms, the stock returns 20 percent while the option returns percent.

For every call bought, there is a call sold. So what are the advantages of selling a call? In short, the payoff structure is exactly the reverse for buying a call. Call sellers expect the stock to remain flat or decline, and hope to pocket the premium without any consequences. The appeal of selling calls is that you receive a cash premium upfront and do not have to lay out anything immediately. Then you wait until the stock reaches expiration.

Just ask traders who sold calls on GameStop stock back in January and lost a fortune in days. However, there are a number of safe call-selling strategies, such as the covered call, that could be utilized to help protect the seller. The other major kind of option is called a put option, and its value increases as the stock price goes down. In this sense, puts act like the opposite of call options, though they have many similar risks and rewards:. For more, see everything you need to know about put options.

While options can be risky, traders do have ways to use them sensibly. Of course, if you still want to try for a home run, options also offer you that opportunity, too. How We Make Money. Editorial disclosure.

Share this page. If the stock price tanks, the short call offers minimal protection. Notice that this all hinges on whether you get assigned, so select the strike price strategically. You might be giving up the potential for hitting a home run if XYZ rockets above the strike price, so covered calls may not be appropriate if you think your stock is going to shoot the moon.

Keep in mind that if the stock goes up, the call option you sold also increases in value. What happens when you hold a covered call until expiration? First, if the stock price goes up, the stock will most likely be called away perhaps netting you an overall profit if the strike price is higher than where you bought the stock. Second, if the stock price moves up near the strike price at expiration you would get to keep the stock and have the gain from keeping the full premium of the now-worthless option.

A covered call has some limits for equity investors and traders because the profits from the stock are capped at the strike price of the option.

The real downside here is chance of losing a stock you wanted to keep. Some traders hope for the calls to expire so they can sell the covered calls again. Others are concerned that if they sell calls and the stock runs up dramatically, they could miss the up move. Covered calls, like all trades, are a study in risk versus return.

What Are Call Options?

With the tools available at your fingertips, you could consider covered call strategies to potentially generate income. Not investment advice, or a recommendation of any security, strategy, or account type. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Clients must consider all relevant risk factors, including their own personal financial situations, before trading. A covered call strategy can limit the upside potential of the underlying stock position, as the stock would likely be called away in the event of substantial stock price increase. Additionally, any downside protection provided to the related stock position is limited to the premium received.

Short options can be assigned at any time up to expiration regardless of the in-the-money amount. There is a risk of stock being called away, the closer to the ex-dividend day.

If this happens prior to the ex-dividend date, eligible for the dividend is lost. Income generated is at risk should the position moves against the investor, if the investor later buys the call back at a higher price. The investor can also lose the stock position if assigned. The maximum risk of a covered call position is the cost of the stock, less the premium received for the call, plus all transaction costs.

Short Call – Bearish Option Strategy

Rolling strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return. You are responsible for all orders entered in your self-directed account. Fearful traders panic and dump their holdings at a loss, which pushes stock prices down further and ignites a fresh round of selling.

Investors can use several bear-option strategies to profit from a market-wide selling frenzy. The goal is for the stock price to drop below the put option strike price so the option is in the money prior to expiration. The amount of risk is limited to the option price plus the commission. Trading bear put spreads limits your loss while providing a good return.

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4. Covered Call.

The trade works by buying an in-the-money put and simultaneously selling an out-of-the-money put. The maximum profit is reached when the stock closes below the out-of-the-money put prior to expiration. The maximum loss is the amount you pay to enter the trade plus commission. Collect money upfront by trading a low-risk bear call spread. The profit is the premium paid by buying out-of-the-money calls while simultaneously selling in-the-money calls.