Monday, 21 July 2014

TWO WAYS TO SELL AN OPTION

In contrast to buying options, selling stock options does come with an obligation - the obligation to sell the underlying equity to a buyer if that buyer decides to exercise the option and you are "assigned" the exercise obligation. "Selling" options is often referred to as "writing" options.
When you sell (or "write") a Call - you are selling a buyer the right to purchase stock from you at a specified strike price for a specified period of time, regardless of how high the market price of the stock may climb.
Covered Calls
One of the most popular call writing strategies is known as a covered call. In a covered call, you are selling the right to buy an equity that you own. If a buyer decides to exercise his or her option to buy the underlying equity, you are obligated to sell to them at the strike price - whether the strike price is higher or lower than your original cost of the equity. Sometimes an investor may buy an equity and simultaneously sell (or write) a call on the equity. This is referred to as a "buy-write."


Examples: You buy 100 shares of an ETF at $20, and immediately write one covered Call option at a strike price of $25 for a premium of $2 You immediately take in $200 - the premium.
·        If the ETF's market price stays under $25, then the buyer’s option will expire worthless, and you have gained the $200 premium.
·        If the ETF's price rises above $25, you may have to sell your ETF and will lose its upside appreciation above $25 per share.
·        Or, you can close out your position by buying an option on the same ETF with the same strike price and expiration in a closing transaction to at least partially reduce a potential loss.
Uncovered Calls
In an uncovered call, you are selling the right to buy an equity from you which you don’t actually own at the time.
Examples: You write a Call on a stock for a premium of $2, with a current market price of $20, and a strike price of $25. Again, you immediately take in $200 - the premium.
·        If the stock price stays under $25, then the buyer’s option expires worthless, and you have gained $200 premium.
If the stock price rises to $30 and the option is exercised, you will have to buy 100 shares of the stock at the $30 market price to meet your. 

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