Profit from Selling Calls

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By www.Options-Trading-Education.com


Profit from Selling Calls

You have invested in Xyz Corporation and the stock has risen nicely. However, your own fundamental and technical analysis tells you that the stock is likely to level off or even experience a correction before continuing upward. You do not want to sell the stock as you firmly believe that it is an excellent medium and long term investment.
However, you would like to benefit from some of the current hype about the stock. Here is a situation where you might want to profit from selling calls on Xyz Corporation. Think of selling calls as an extra dividend. If done right this one of the good times for trading options. But, be aware that if you want to profit from selling calls you also run the risk of missing out on a rise in the stock price.

Selling Calls

A call is an options contract. The seller gains a payment for giving the buyer the right to purchase the stock at a fixed price, the strike price, up until the expiration of the contract. If the stock does not rise in price the seller gains the price of the options contract. If the stock rises in price the buyer can exercise the option, purchase at the strike price, and own the stock for less than new market price. The seller, in this case, is paid for the stock and pockets the price of the option. He or she needs to purchase the stock again if he or she believes it is a good investment. This can be a profitable long options strategy.

When Selling Calls is Profitable

The owner of a stock will always profit from selling calls on the stock. He or she will gain the contract price. However, if the owner of the stock really does not want to give up a stock that promises to rise in price he or she must be careful to only sell calls on the stock when the stock price is flat or likely to fall a little during the term of the options contract. In a cyclical stock market it is a common practice for smart investors to profit from selling calls when they believe that the stock has come to its peak.
A person who has owned a stock for a long time and is thoroughly versed in the fundamentals and technical factors that drive its price can often profit from selling calls because of the accuracy of his judgment regarding the stock.

When Selling Calls Can Be Tricky

In general we are talking about covered calls in this article. However, uncovered calls are a different matter. A trader may wish to take advantage of options trading leverage to gain profits in the market. He does not own the stock.
Rather he has a margin account with a stock broker. If his judgment is correct the stock will not rise in price and he will pocket his profits without ever having to invest in Xyz Corporation. However, if the company becomes the target of a takeover bid the stock price may rise significantly. His losses may be significant. In fact, he may be subject to a margin call on his account if losses are bad enough.

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Profit from Selling Calls

  1. 1. By www.Options-Trading-Education.com
  2. 2. You have invested in Xyz Corporation and the stock has risen nicely. By www.Options-Trading-Education.com
  3. 3. However, your own fundamental and technical analysis tells you that the stock is likely to level off or even experience a correction before continuing upward. By www.Options-Trading-Education.com
  4. 4. You do not want to sell the stock as you firmly believe that it is an excellent medium and long term investment. By www.Options-Trading-Education.com
  5. 5. However, you would like to benefitfrom some of the current hype about the stock. By www.Options-Trading-Education.com
  6. 6. Think of selling calls as an extradividend. If done right this one of the good times for trading options. By www.Options-Trading-Education.com
  7. 7. Here is a situation where you mightwant to profit from selling calls on Xyz Corporation. By www.Options-Trading-Education.com
  8. 8. But, be aware that if you want to profit from selling calls you also runthe risk of missing out on a rise in the stock price. By www.Options-Trading-Education.com
  9. 9. By www.Options-Trading-Education.com
  10. 10. A call is an options contract. By www.Options-Trading-Education.com
  11. 11. The seller gains a payment for giving the buyer the right to purchase thestock at a fixed price, the strike price,up until the expiration of the contract. By www.Options-Trading-Education.com
  12. 12. If the stock does not rise in price the seller gains the price of the options contract. By www.Options-Trading-Education.com
  13. 13. If the stock rises in price the buyer can exercise the option, purchase atthe strike price, and own the stock for less than new market price. By www.Options-Trading-Education.com
  14. 14. The seller, in this case, is paid for the stock and pockets the price of the option. By www.Options-Trading-Education.com
  15. 15. He or she needs to purchase the stockagain if he or she believes it is a good investment. By www.Options-Trading-Education.com
  16. 16. This can be a profitable long options strategy. By www.Options-Trading-Education.com
  17. 17. By www.Options-Trading-Education.com
  18. 18. The owner of a stock will alwaysprofit from selling calls on the stock.He or she will gain the contract price. By www.Options-Trading-Education.com
  19. 19. However, if the owner of the stockreally does not want to give up a stockthat promises to rise in price he or she must be careful to only sell calls on the stock when the stock price is flator likely to fall a little during the term of the options contract. By www.Options-Trading-Education.com
  20. 20. In a cyclical stock market it is acommon practice for smart investorsto profit from selling calls when theybelieve that the stock has come to its peak. By www.Options-Trading-Education.com
  21. 21. A person who has owned a stock for a long time and is thoroughly versed inthe fundamentals and technical factors that drive its price can often profit from selling calls because of the accuracy of his judgment regarding the stock. By www.Options-Trading-Education.com
  22. 22. By www.Options-Trading-Education.com
  23. 23. In general we are talking about covered calls in this article. By www.Options-Trading-Education.com
  24. 24. However, uncovered calls are a different matter. By www.Options-Trading-Education.com
  25. 25. A trader may wish to take advantage of options trading leverage to gainprofits in the market. He does not own the stock. By www.Options-Trading-Education.com
  26. 26. Rather he has a margin account with a stock broker. By www.Options-Trading-Education.com
  27. 27. If his judgment is correct the stock will not rise in price and he willpocket his profits without ever having to invest in Xyz Corporation. By www.Options-Trading-Education.com
  28. 28. However, if the company becomes thetarget of a takeover bid the stock price may rise significantly. By www.Options-Trading-Education.com
  29. 29. His losses may be significant. In fact,he may be subject to a margin call onhis account if losses are bad enough. By www.Options-Trading-Education.com
  30. 30. The point of all this is that it is a safebet in covered options trading to try to profit from selling calls when you own the stock. By www.Options-Trading-Education.com
  31. 31. For more insights and usefulinformation regarding options and options trading, visit .
  32. 32. It can be a tricky thing to write options on stocks you do not ownunless you have very deep pockets. By www.Options-Trading-Education.com

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