"Selling Calls". Folks, I see a need for some basi
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Posted On: 07/16/2021 12:21:42 PM
"Selling Calls". Folks, I see a need for some basic information on selling "call" options. The problem with many websites is they only give a simple short 2 or 3 sentence answer.
First of all, everything posted this morning is incorrect. You don't make huge returns selling "covered call options". When you sell a call against the stock you own you don't really want it to go up in price very rapidly.
Lets say your stock is selling today at $20 and you sell a call with a strike price of $25 that expires at a particular date, in lets say three months, so you get the premium from the buyer now but if the stock goes to more than $25 at the end of three months (expiration date), you have to deliver the shares for $25 to the "call" buyer at the expiration date. Remember he paid you a premium for the right to buy your shares at $25 on a particular date in the future and he is betting the stock will be worth more than $25 at expiration and you are saying it won't, so you sold him the right to take it from you at $25. In this example the "call" is "out of the money" and is worth only what the market thinks it is worth for the time remaining before the option expires. The time remaining before expiration and the strike price determines the value. If it is "out of the money" and expires in a week it is probably worthless, but that is what you want if you sell a covered call option against your stock, you want a "premium" and then the stock not move beyond the "strike price" before expiration. Therefore you collected a premium and also keep the stock. The premium is determined by the "market" and selling calls is a way to get a little extra income, but you always risk loosing the stock at expiration because if it goes above the $25 at expiration you will loose the stock. Yes you keep the profits from $20 to $25 but anything above that $25 is now the option holders profit because he gets it from you for $25 at expiration. Remember you sold your "rights" back at $20 to pay you $25.
Some will say to sell "in the money" call options, yes you get the difference above the strike price relative to expiration, but if the stock does not go down, you will loose the stock.
Remember the "expiration" date is a huge factor in the price of an option.
Selling covered calls is a conservative way to get a LITTLE extra income but you are betting the price won't go up above the strike price because you loose you stock at expiration if it does. And no, it is not as simple as just buying back your own option because the price is above the strike price because now the "call" is "in the money" and the option goes up relative to the strike price, with expiration date also factored in.
So the risk of selling calls is selling your stock at a price lower than you think it will go and if you are not yet long term capital gain status, you just lost that benefit and created a higher tax burden.
I hope this helps clarify selling calls, it is NOT a make big money strategy.
First of all, everything posted this morning is incorrect. You don't make huge returns selling "covered call options". When you sell a call against the stock you own you don't really want it to go up in price very rapidly.
Lets say your stock is selling today at $20 and you sell a call with a strike price of $25 that expires at a particular date, in lets say three months, so you get the premium from the buyer now but if the stock goes to more than $25 at the end of three months (expiration date), you have to deliver the shares for $25 to the "call" buyer at the expiration date. Remember he paid you a premium for the right to buy your shares at $25 on a particular date in the future and he is betting the stock will be worth more than $25 at expiration and you are saying it won't, so you sold him the right to take it from you at $25. In this example the "call" is "out of the money" and is worth only what the market thinks it is worth for the time remaining before the option expires. The time remaining before expiration and the strike price determines the value. If it is "out of the money" and expires in a week it is probably worthless, but that is what you want if you sell a covered call option against your stock, you want a "premium" and then the stock not move beyond the "strike price" before expiration. Therefore you collected a premium and also keep the stock. The premium is determined by the "market" and selling calls is a way to get a little extra income, but you always risk loosing the stock at expiration because if it goes above the $25 at expiration you will loose the stock. Yes you keep the profits from $20 to $25 but anything above that $25 is now the option holders profit because he gets it from you for $25 at expiration. Remember you sold your "rights" back at $20 to pay you $25.
Some will say to sell "in the money" call options, yes you get the difference above the strike price relative to expiration, but if the stock does not go down, you will loose the stock.
Remember the "expiration" date is a huge factor in the price of an option.
Selling covered calls is a conservative way to get a LITTLE extra income but you are betting the price won't go up above the strike price because you loose you stock at expiration if it does. And no, it is not as simple as just buying back your own option because the price is above the strike price because now the "call" is "in the money" and the option goes up relative to the strike price, with expiration date also factored in.
So the risk of selling calls is selling your stock at a price lower than you think it will go and if you are not yet long term capital gain status, you just lost that benefit and created a higher tax burden.
I hope this helps clarify selling calls, it is NOT a make big money strategy.
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