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.
2. You have invested in Xyz Corporation
and the stock has risen nicely.
By www.Options-Trading-Education.com
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. 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. However, you would like to benefit
from some of the current hype about
the stock.
By www.Options-Trading-Education.com
6. Think of selling calls as an extra
dividend. If done right this one of the
good times for trading options.
By www.Options-Trading-Education.com
7. Here is a situation where you might
want to profit from selling calls on
Xyz Corporation.
By www.Options-Trading-Education.com
8. 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.
By www.Options-Trading-Education.com
10. A call is an options contract.
By www.Options-Trading-Education.com
11. 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.
By www.Options-Trading-Education.com
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. 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.
By www.Options-Trading-Education.com
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. He or she needs to purchase the stock
again if he or she believes it is a good
investment.
By www.Options-Trading-Education.com
16. This can be a profitable long options
strategy.
By www.Options-Trading-Education.com
18. The owner of a stock will always
profit from selling calls on the stock.
He or she will gain the contract price.
By www.Options-Trading-Education.com
19. 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.
By www.Options-Trading-Education.com
20. 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.
By www.Options-Trading-Education.com
21. 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.
By www.Options-Trading-Education.com
25. A trader may wish to take advantage
of options trading leverage to gain
profits in the market. He does not own
the stock.
By www.Options-Trading-Education.com
26. Rather he has a margin account with a
stock broker.
By www.Options-Trading-Education.com
27. 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.
By www.Options-Trading-Education.com
28. However, if the company becomes the
target of a takeover bid the stock price
may rise significantly.
By www.Options-Trading-Education.com
29. His losses may be significant. In fact,
he may be subject to a margin call on
his account if losses are bad enough.
By www.Options-Trading-Education.com
30. The point of all this is that it is a safe
bet in covered options trading to try to
profit from selling calls when you
own the stock.
By www.Options-Trading-Education.com
31. For more insights and useful
information regarding options and
options trading, visit
.
32. It can be a tricky thing to write
options on stocks you do not own
unless you have very deep pockets.
By www.Options-Trading-Education.com
