Option sellers collect a cashpremium. That's
the primary reason that investors sell an option. When that option expires
worthless, the cash premium represents the option seller's profit, but it does
involve some risk of losing money. Pretty simple stuff.
Similarly, traders may sell an option as part ofaspread position.
Once again, collecting a cash premium drives the sale. However, this time, the
cash collected is used as a hedge,
or a trade that offsets the risk of owning another position. Hedging is a bit
more complex than simply selling an option. For example, when you buy one call
option (hoping for the stock to rally), you can sell a different option,
collect some cash, and reduce the sum of money at risk -- just in case your
expected rally does not occur. The concept is easy to understand once you learn
to understand how options work.) About options for beginners will help.
Options do not always expire worthless, and it is essential that every
option trader understands what happens when the option does not expire
Whenever you sell (write) an option that you do not already own, you
become legally obligated to honor the terms of the option contract sold.
WHAT ARE THOSE OBLIGATIONS?
The call seller
agrees to sell 100 shares of the underlying stock to the call owner. The trade
occurs at the option strike price.
This obligation remains in effect until the option expires.
The put seller
agrees to buy 100 shares of the underlying stock from the put owner. The trade
occurs at the option strike price. This obligation remains in effect
until the option expires.
WHAT TRIGGERS THE OBLIGATIONS?
are only theoretical until something happens that triggers the process. Call owners have the right to
force the option seller to honor his/her obligations by exercising those rights. As soon
as the call owner instructs his/her broker to exercise, the option seller's
obligations are triggered. Note that the option seller cannot force
the option owner to exercise. That decision rests entirely with the option owner
who bought the option and paid cash to own the right to exercise.
STRATEGY Covered call writingis a very popular option strategy and is
especially well suited for people who are first learning how options work. Once
you gain a fairly good understanding of the basic concepts involving options
and understand the risk and rewards associated with owning stocks, that is a
good time to consider adopting this strategy. However, there is more to this simple strategy
that is apparent at first glance. It is important to understand why an investor
would want to write covered calls. Thus, you want to know about the philosophy. Next
it is essential to know about the risk, orwhat can go wrongwhen you buy stock and sell one call
option for each 100 shares owned. NOTE: The name of the strategy comes from the
fact that the stock owner is covered -- if and when he/she
is everassigned an exercise noticeon the short call option. In other
words, if assigned, the trader already owns the shares and can deliver (sell)
them to the person whoexercised the option. IS COVERED CALL WRITING (CCW) FOR YOU? ·CCW is a strategy for the investor who does not
believing in trying to time the market. As long as you are willing to have your
cash invested in the specific stock (or index), it is a reasonable idea to own
the stock and write the calls. However, if you never want to sell the stock and
if your intention is to hold for a long time, then this is not a suitable
strategy. ·CCW is for the investor who wants a higher
probability of earning a profit with every trade, even when the profit is
limited. Clarification: The profit is earned more frequently than the trader
who simply buys stock and does not hedge the position by selling a call option.