Profit from Selling Calls

By www.Options-Trading-Education.com

You have invested in Xyz Corporation
and the stock has risen nicely.


However, your own fundamental and
technical analysis tells you that the
stock is likely to level off or even
experience a correction before
continuing upward.


You do not want to sell the stock as
you firmly believe that it is an
excellent medium and long term
investment.


However, you would like to benefit
from some of the current hype about
the stock.


Think of selling calls as an extra
dividend. If done right this one of the
good times for trading options.


Here is a situation where you might
want to profit from selling calls on
Xyz Corporation.


But, be aware that if you want to
profit from selling calls you also run
the risk of missing out on a rise in the
stock price.


A call is an options contract.


The seller gains a payment for giving
the buyer the right to purchase the
stock at a fixed price, the strike price,
up until the expiration of the contract.


If the stock does not rise in price the
seller gains the price of the options
contract.


If the stock rises in price the buyer
can exercise the option, purchase at
the strike price, and own the stock for
less than new market price.


The seller, in this case, is paid for the
stock and pockets the price of the
option.


He or she needs to purchase the stock
again if he or she believes it is a good
investment.


This can be a profitable long options
strategy.


The owner of a stock will always
profit from selling calls on the stock.
He or she will gain the contract price.


However, if the owner of the stock
really does not want to give up a stock
that promises to rise in price he or she
must be careful to only sell calls on
the stock when the stock price is flat
or likely to fall a little during the term
of the options contract.


In a cyclical stock market it is a
common practice for smart investors
to profit from selling calls when they
believe that the stock has come to its
peak.


A person who has owned a stock for a
long time and is thoroughly versed in
the fundamentals and technical factors
that drive its price can often profit
from selling calls because of the
accuracy of his judgment regarding
the stock.


In general we are talking about
covered calls in this article.


However, uncovered calls are a
different matter.


A trader may wish to take advantage
of options trading leverage to gain
profits in the market. He does not own
the stock.


Rather he has a margin account with a
stock broker.


If his judgment is correct the stock
will not rise in price and he will
pocket his profits without ever having
to invest in Xyz Corporation.


However, if the company becomes the
target of a takeover bid the stock price
may rise significantly.


His losses may be significant. In fact,
he may be subject to a margin call on
his account if losses are bad enough.


The point of all this is that it is a safe
bet in covered options trading to try to
profit from selling calls when you
own the stock.


For more insights and useful
information regarding options and
options trading, visit

.

It can be a tricky thing to write
options on stocks you do not own
unless you have very deep pockets.


Profit from Selling Calls

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