http://www.options-trading-education.com/14397/selling-call-options-without-owning-stock/
Selling Call Options without Owning Stock
Options traders often profit from selling call options without owning stock. 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.
2. Options traders often profit from selling call options
without owning stock.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
3. 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.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
4. The trader receives a premium for selling the call
contract.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
5. This is his profit so long as the buyer does not
exercise the contract.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
6. If the price of the equity rises sufficiently the trader
will exercise the option in order to buy the equity.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
7. When this happens the seller needs to purchase the
stock at the current market price.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
8. However, he will sell it to the buyer at the strike price
of the contract.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
9. 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.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
10. If the equity rises significantly in price the trader can
lose a lot of money when selling call options without
owning stock.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
11. That having been said, sellers of options tend to
make more money than buyers of options over the
long term.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
12. Call Contracts in
Options Trading
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13. A call option is a financial contract between two
parties.
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14. 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.
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15. Unlike the buyer, the seller of a call option is obliged
to sell the equity whether he has it in his possession
or not.
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16. The buyer pays a fee to the seller for the rights
inherent in the contract.
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17. 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.
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18. When trading European style options the contract
can only be executed on expiration.
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19. In American style options trading the buyer can
exercise the contract at any time during the course
of the contract.
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21. In selling call options without owning stock it is wise
to choose stable stocks or stocks likely to fall in
value.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
22. Traders often consult the VIX. This is a weighted
measure of options on the S&P 500 index.
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23. It measures out of the money calls and puts. The
VIX uses a mathematical formula to produce its
number.
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24. This is a measure of volatility but not necessarily a
predictor or market direction.
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25. A trader wishing to make money selling call options
without owning stock will prefer a low VIX number.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
26. 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.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems
27. And, as in all trading it is wise to sit out any and all
trades which you do not understand.
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28. Options help buyers hedge risks but the entity that
provides the insurance in these situations in the
options seller.
http://www.profitableinvestingtips.com/stockinvesting/unh-stock-response-to-obama-careproblems