At some point I'll probably want to try selling options. I like the idea of receiving the premium immediately and (hopefully) not having to sell my shares. But one part escapes me so please excuse my very entry level question. If I sell call options on shares I own I receive the premium immediately but if the shares get called away, what do I lose? Do I lose the shares and the money I bought them for (leaving just the premium) or do I lose the shares by selling them at less than I could have received and therefore I still have the amount that I paid for them? 🤔 Options experts, please chime in. Thanks!
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9 Comments
AMDY
@penjen · 11d
Depends on your main objective to derive consistent premiums from your long term stock or generate net capital gains with premiums on short term plays.
Canadian Investor@canadianinvestor · 13d
You always keep the premium. Sell a put option and the stock goes way below your strike price you still keep the premium. Sell a call and the stock price shoots way above your strike you keep the premium. The risk are related to the underlying investment for a covered call if you do not want to lose the shares you should sell the call out of the money. You get paid more premium the closer the strike price is to the current price of the stock when you sell the call. If the stock price is below your strike price you keep the shares and the premium. Now look at a stock like $TU$NKE and if you would have bought those over the past few years you could have sold covered calls but eventually the stock price has fallen so much lower you can not sell calls above the purchase price. Selling calls or puts won't change the risk related to the stock price and the amount of premium you can generate is related to the stock price. It sounds magically like collecting free money but once you start doing it you will see it's really not. If you collect $100 in premium and the stock price falls by that amount you haven't made any money. When you originally sell the call option you will get $100 in cash into your account and you will open an contract with a liability of $100.00 that liability will change price until the option contract closes. If the price of the stock goes up that liability gets more expensive if it goes over the strike price it continues to get more expensive as you approach the expiration date you can either buy to close the contract at a loss or let the shares go. If the stock price drops the contract gets less expensive you can close the contract at any point prior to the expiration date by buying it back and if you buy it back at less than you were paid the difference is your realized gain. But it also means the stock price has gone down from where you sold the call. There are many nuances to managing the option once you have sold it but that is the basic idea. This is one of the reason people like covered call ETFs the manager does all this however when you sell the calls you will have a better understanding of the transaction. You don't typically see the open liability when you buy the covered call ETF. If you want to do it, look for a paper trading account it lets you play with fake money for a bit so you can see the different parts the basics are not complicated the complications come with the managing over time. Enjoy !
G
@gndoi · 13d
Selling a call means you promise to sell them to someone for the strike price by the expiration date. You get to keep your premium and make some profit on the stock appreciation up to the strike price. This is essentially what a covered call is.
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