Selling Call Options without Owning Stock

By
www.Options-Trading-Education.com

 Options traders often profit from selling call options

without owning stock.

http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems

 In this variety of uncovered options trading the trader

believes that the price of the equity underlying the
options contract will remain the same or fall in price.


 The trader receives a premium for selling the call

contract.


 This is his profit so long as the buyer does not

exercise the contract.


 If the price of the equity rises sufficiently the trader

will exercise the option in order to buy the equity.


 When this happens the seller needs to purchase the

stock at the current market price.


 However, he will sell it to the buyer at the strike price

of the contract.


 He will lose money on the difference. In such a case

of selling call options without owning stock the loss
for the seller is the difference between the market
price and the strike price plus fees and commissions.


 If the equity rises significantly in price the trader can

lose a lot of money when selling call options without
owning stock.


 That having been said, sellers of options tend to

make more money than buyers of options over the
long term.


Call Contracts in

Options Trading


 A call option is a financial contract between two

parties.


 The buyer of the call option has the right, but is

under no obligation to buy an agreed quantity of a
particular equity from the seller at a specified time
called the expiration date for a set price called the
strike price.


 Unlike the buyer, the seller of a call option is obliged

to sell the equity whether he has it in his possession
or not.


 The buyer pays a fee to the seller for the rights

inherent in the contract.


 When an options seller does not possess the equity

in question he needs to have money in a margin
account sufficient to cover his losses.


 When trading European style options the contract

can only be executed on expiration.


 In American style options trading the buyer can

exercise the contract at any time during the course
of the contract.


Choosing Options to

Sell


 In selling call options without owning stock it is wise

to choose stable stocks or stocks likely to fall in
value.


 Traders often consult the VIX. This is a weighted

measure of options on the S&P 500 index.


 It measures out of the money calls and puts. The

VIX uses a mathematical formula to produce its
number.


 This is a measure of volatility but not necessarily a

predictor or market direction.


 A trader wishing to make money selling call options

without owning stock will prefer a low VIX number.


 A buyer will obviously prefer the opposite. As in

trading stocks directly an options trader should
consult both stock fundamentals and technical
measures of market sentiment before buying or
selling options contract.


 And, as in all trading it is wise to sit out any and all

trades which you do not understand.


 Options help buyers hedge risks but the entity that

provides the insurance in these situations in the
options seller.


Selling Call Options without Owning Stock

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