Selling Call Options
Selling Call Options is in general not the first trade an investor makes. It is contrary trade of buying calls. A trader that buys a call option expect the underlying to increase in price.
Typically a trader select options which have a high Implied Volatility. These options are rich on premium.
A trader that is selling call options receives option premium. Option traders knows that implied volatility will revert to the mean. The premium of the options will drop in price. And than you will be able to buy the option back much cheaper.
If you do not own the stock and you are Selling call options it is called selling a naked call. Selling naked calls involves unlimited risk because the underlying asset could theoretically increase indefinitely.
How to Sell Call Options
Sell call options one strike out of the money, this option has in general a 60% probability of profit.
The breakeven price is above the strike price of the option. When you sell out of the money calls you can benefit when the underlying price goes down, stays flat or moves up a little until breakeven.
For an trader who has sold uncovered or naked calls, the maximum gain is always limited to the amount of the option premium they received when they sold the calls.
When the call option moves in the money a trader might use his right and exercise the option. You got assigned. If assigned, the seller would be short stock. You have to buy the security on the open market at rising prices to deliver it to the buyer exercising the call at the strike price.
Watch Rachel how she explains selling call options
If you do not like trading with (un)limited risk consider defined risk trades.
What is the world’s most profitable business? Warren Buffet states that insurance is the world’s most profitable business. A company sells reams of insurance policies and collects payment for each. A few of those result in claims – which are paid out of premiums collected. The rest is kept as profit. Selling options is as selling insurrance. contiunue to read on option-selling