How to Sell Call Options

The world of options trading needs the two essential components of trading - a buyer or seller. Although you might have done your research on options buying, it is worth learning more about options selling. Selling call options requires specific strategies to maximize profit in certain market conditions. This is everything you need to know about options.

What's a Call Option?

Let's look at the basics of call options to help you answer the question "What is selling call options?".

Options are financial instruments that draw their value from an asset. An call option, which is basically a type derivatives contract, gives the option buyer the right but not the obligation to purchase the asset at a specified price (known as the strike value) before or after a certain date. The selling of calls options is often done in large quantities of 100 shares.

Call Options

Let's now look at the topic of call option sales. First, it is important to note that although a buyer of a calling option doesn't have to buy the asset, the seller does have to sell it if the buyer exercises his right. The buyer can exercise this right at any time before the expiration date, and at the stipulated strike price.

The option buyer's likelihood of making a profit by exercising his option to buy before expiry determines the price a seller will receive for it. This is determined by the strike price and the remaining time until the expiration of the option.

An option seller must hope that the asset's price falls and the option is worthless by the expiration date. This allows the seller to keep the premiums or money he received for selling the option as profit. Selling calls doesn't multiply your money like buying calls, but it can make you a profit in the unlikely event that the asset's value falls or stays flat. The best time to sell call options would be when you expect that the asset will not rise in value before its expiration date.

Types Of Selling Call Options

Although call option strategies may vary from investor to investor and vice versa, there are two main ways that an investor can make a sale of call options.

Covered call: In this selling call strategy the seller is the owner of the underlying asset for the call option. Selling calls is considered low-risk because the seller previously bought the asset at a lower price than the strike price. The seller is "covered" against loss and can also receive additional income from the profit.

The covered call is covered, but the seller doesn't own the underlying asset. This selling strategy is high-risk because the seller isn't protected against potential losses by not owning the asset.

Although the risk of each type of selling call strategy is different, they all have their pros and cons. Selling call strategies with naked calls can often have lower upfront costs because the associated risks are higher. Selling call options with covered calls, on the other hand, ensures that the seller is secure, regardless of how the asset's value moves.

Conclusion

Selling call options is an important part of options trading. It is therefore essential to create your own selling strategy for call options. Timing is crucial when selling call options. This means knowing when and which options to sell is equally important. Before you take on the challenge of selling call option, be cautious and do your research.