Sell a Call

How to Sell a Call Option

8 min read

When you sell a call option, you’re bearish. You sell the call short and want it to drop in value. You keep the premium (money). It is the opposite strategy of buying a long put, where you still want the price to drop. However, when you sell a call, you make money if the stock moves sideways or drops. So you’re making money in two directions versus when you buy a put, you NEED the stock to drop. You lose money if the stock trades sideways when you’re long a put option. See how selling is better?

You are selling the call (you’re short, the buyer is long) to the buyer of an option because you believe the stock price will fall, while the buyer believes it is going up. The trading odds are in your favor as a seller. However, there’s unlimited risk in being a naked seller. The safest way to be an options seller is with spreads. 

Do you know how to sell a call? There are different strategies available to you. How does selling a call benefit you? You can watch the video above to learn more. The stock market is a battleground between sellers and buyers. As a result, it trades in cycles. Hence, it’s important to learn how to sell call options and other money-making techniques outside of buying straight calls and puts.

To sell a call means you give someone else the right but not the obligation to buy the contract from you at a certain price within a certain date.  

Two Types

If you’re trading options, you’re trading two types. They’re known as calls and puts. Beginner options traders tend to be most familiar with buying them “long.” You may be nodding along if you’re a new trader. So I’ll ask you, “Do you know how to sell a call spread?” You should…

Let’s talk about options before we get into how to sell a call. Options give you the right but not the obligation to buy or sell a stock at a certain price within a set time frame. Options are wasting assets because they expire at a specific date in the future, and the time value of that option is built into the contract’s price.

One option contract controls 100 shares. As a result, trading options tend to be cheaper because you’re not buying 100 shares outright. However, you can use options to do just that if you want. 

Many trading services offer options because they’re unique and have many strategies. In this post, we will talk about how to sell a call. Selling calls is unique and a great way to make a profit. Call spreads are one of the ways we like to swing trade because of the higher probability of a successful trade versus BUYING a call.

Sell a Call Option Basics

No matter whether you’re just beginning to learn stock market trading or you’re an old pro, we’re all familiar with buying calls. It’s the most simple form of options trading.

However, the more you learn, the more you realize that options are more complex. The different moving parts affect your profit and loss potential. 

Don’t let that overwhelm you, however. Our options trading course was created to help you learn the ins and outs of options trading. There, you’ll learn about the Greeks, open interest, and implied volatility, to name a few things. 

You may be wondering what all that has to do with wanting to sell a call. Did you know that 80% of options expire worthless? Selling a call is taking advantage of those worthless options and giving you some powerful statistical odds that you’ll make money.

In short, when you sell, you hope it expires worthless so you can pocket the premiums. The premium is what the buyer pays. 

Example on How to Sell a Call

This is an example of selling call options in the ThinkorSwim platform.

Reasoning Behind Selling Options

A call option is taking the bullish side of a trade. However, when you sell a call, you hope the opposite will happen. You’re a big ol bear who wants the stock to drop in value. Good for you! Bears need love, too.

In other words, selling a call means you’re bearish on the stock. For example, you believe stock ABCD stock is going to fall. As a result, you decide to sell a call in the hopes someone believes it will go up. One of you is right, but both of you think you’re right….think about that irony for a minute…

So, once the trade is placed, you need the stock price to fall. If it did, you’d get to keep the premium, and it expired worthless. If the buyer paid $345 for a call and the price fell, you’d get to keep the $345. Nice huh?

In essence, the practice of selling a call is taking the opposite bias.

COMPANY
TradeStation ThinkorSwim Logo Tastytrade Logo
DESCRIPTION Experience TradeStation's professional-grade options trading platform, built for serious traders seeking value and power ThinkorSwim is for more advanced options traders. It features elite tools and lets you monitor the market, plan your strategy, and implement it in one convenient, easy-to-use, integrated place Trade options on stocks, ETFs, and broad-based indices. Trade equity and ETF options online for $1.00 per contract opening commission and $0 commission to close, capped at $10.00 per leg
HIGHLIGHTS

What to Look for When Selling Calls

When you go to sell, we’ve established that you’re looking for the stock to fall. How can you be comfortable in making that trade?

You will want to look at candlesticks, patterns, support, and resistance. All of these can help you make smarter trades.

It’s important to remember that not every trade will work 100% of the time. Even the best traders fail 30-40% of the time. As a result, even when you sell a call, you can lose.

Selling a call can be quite risky. However, if done right, it’s also very lucrative. 

Before selling options, you have to ensure the charts give that signal. It would be best if you were on the right side of the trade while someone else is not.

Risks On When You Sell a Call

  • They’re very popular since options are a great way to make money without a large account. Their trading allows you to make money no matter what the market is doing.
  • However, when you sell a call, you must sell your stock shares to the buyer at whatever strike price you agreed upon. That means if the price went up instead of down, the buyer gets cheaper shares, and you’re out.
  • You often plan a trade, and your options chain may show you your risk vs. reward. You’ll find that the you’ll sell options greatly outweighs the reward.
  • However, don’t let that deter you from selling. Have a goal in mind. Once you reach that goal, close out the trade. If the trade goes against you, get out of it as soon as possible to protect yourself.
  • Since most stock options expire worthless, advanced traders have used selling options as a profitable trading strategy.

Final Thoughts

Since the strategy to sell a call is risky, practice. Open a simulated account. We’re fans of ThinkorSwim. With a paper trading account, you can see how the moving parts of options work.

Practice taking the bearish bias by going to sell a call. What patterns work the best? How profitable is it? Would you be comfortable taking the risk?

These are all questions you can answer by practicing in a simulated account. That way, you’re not risking your money. You always want to place many practice trades before using real money.

When you sell a call, you take a bearish bias on the stock. Smart stock market trading is all about minimizing risk. Make sure you’ve looked at the charts and have a good indication that a stock is going bearish.

Frequently Asked Questions

The maximum loss is unlimited if you sell a call. There is no ceiling price on how high a stock can go. When selling puts, the price of a stock could theoretically drop to zero.

Selling a call is bearish because the seller of the option profits if the shares don't increase. Buying a call option is bullish because the buyer profits if the stock increases.

Selling calls naked can be a very good strategy, but it is also risky because the losses can be drastic. A popular alternative would be selling covered calls.

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