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             26 October, 2020
 

    
Category:  Articles » Finances » Stocks-Mutual-Funds

 

About Selling Call Options, Part 2

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         Views: 1492
2007-08-06 17:29:38     
Article by Mark Crisp

While buyers seek options with the lowest possible time value and with the stock's market value within reasonable proximity to striking price, sellers do the opposite. They seek calls with the highest possible time value and the largest possible gap between striking price of the option and market value of the stock.

Tip: Time is the buyer's enemy, but the opposite is true for the seller. The seller makes a profit as time value evaporates.

When you sell a call, you grant the buyer the right to buy 100 shares of the underlying stock at the striking price, at any time prior to expiration. That means that you assume the risk of being required to sell 100 shares of the underlying stock to the buyer, potentially at a striking price far below current market value. The decision to exercise is the buyer's, and that decision can be made at any time. Of course, as long as the call is out of the money, it will not be exercised. That risk becomes real only if and when the call goes in the money (when the stock's market value is higher than the call's striking price).

All investment strategies contain specific risk characteristics, and these should be clearly identified and fully understood by anyone undertaking the strategy. The risks tend to have unchanging attributes. For example, the risks of buying stocks are consistent from one moment to another. The experienced stock market investor understands this and accepts the risk. However, call selling has a unique distinction. It can be extremely risky or extremely conservative, depending upon whether you also own 100 shares of the stock at the time you sell the call.

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