Many people don’t understand that you can actually sell option contracts without having the stock, or without owning the other option side of the trade.
Selling options is more popular among professionals than buying option contracts. That is because when you sell option contracts, you can allow the time decay to work in your favor.
You need to understand that there are four parts to a trade. You can buy a call or sell a call and you can buy a put or sell a put.
When you’re a buyer of a call, you want stock prices to go up. When you’re a buyer of a put, you want stock prices to go down. When you’re a seller of a call, you want prices to go down, and if you’re a seller of a put, you want stock prices to go up.
Selling a call option is very similar to selling a car that is not on inventory. Car dealerships often sell cars that aren’t even on the lot, because you may want it in a different color, or with special features that they may not have at the time. So what they do is sell the car to you, and then they order it and make it especially for you. That’s often what happens, with selling call options.
What is a call option?
Most people buy calls, at least the beginners. When you buy a call, you want the stock to go up, you have a bullish outlook. However, selling a call means you’re looking for the stock to go down, you have a bearish outlook.
The way most people approach selling calls is they already have a stock position, and then they sell calls against it, in order to hedge or protect that investment. This is also known as a covered call strategy.
The advantage that you have when selling a call is that if the stock stands still, you make money, if it goes down, you make money, and if it goes up a little bit, you still make money. So there is a higher probability of success.
However, the disadvantages of selling a call option contract is that you have a capped or maxed profit, which means you don’t have unlimited profit potential, and also you have unlimited risk, because there’s unlimited loss potential, as the stock price continues to head higher.
In this video we’re going to look at the profit picture and risk profile when it comes to selling a call, and also I’ll show you how to sell a call on an options trading platform.
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