What Does It Mean to Sell a Call Option and Should You Do It?
When you sell a call option it is a strategy that options traders use to collect premium (money!) It is the opposite strategy of buying a put and is a bearish trading strategy. You are selling the call to an options buyer because your believe that the price of the stock is going to fall, while the buyer believes it is going up. The trading odds are in your favor as a seller, however, there’s unlimited risk being a naked seller of a call. The safest way to be an options seller is with spreads. Watch our video on how to sell a call the right way.
Do you know how to sell a call? There are different strategies available to you. How does selling a call benefit you? 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 as well as other techniques for making money outside of the traditional buying of straight calls and puts.
What Happens When You Sell a Call Option?
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.
Trading options is made up of two types. They’re known as calls and puts. Those are what new traders tend to be most familiar with. You may be familiar with buying a call but do you know how to sell a call spread? You should…
Before we get into how to sell a call let’s talk about options. 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 certain specific date in the future, and the time value of that option is built into the price of the contract.
One options contract controls 100 shares. As a result, trading options tends 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’re going to talk about how to sell a call. The concept of 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.
What Does It Mean to Sell a Call Option?
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 (check out our learn options trading page for more help).
However, the more you learn, the more you realize nothing is exactly simple in options. The different moving parts have an affect on 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 a call, you’re hoping that it expires worthless so you can pocket the premiums. The premium is what the buyer pays. Take our options trading course and advanced options strategies course.
What’s the Reasoning Behind Selling Options?
A call option is taking the bullish side of a trade. However, when you sell a call, you’re actually hoping for the opposite to happen.
In other words, selling a call means you’re actually bearish on the trade. For example, you believe stock ABC is going to fall. As a result, you decide to sell a call in the hopes someone believes it’s going to go up.
Once the trade is placed, you need the price of the stock to fall. You’d get to keep the premium. If the buyer paid $345 for a call and price fell, you’d get to keep the $345.
In essence, the practice of selling a call is, in fact, taking the opposite bias.
What to Look for When Selling Options
When you go to sell a call, we’ve established that you’re actually looking for the stock to fall. How can you be comfortable in making that trade?
You’re going to want to look at candlesticks and patterns as well as support and resistance. All of these can help you make smarter trades.
It’s important to remember that not every trade is going to work 100% of the time. In fact, even the best traders fail 30-40% of the time. As a result, even when you sell a call, you have the ability to lose.
In fact, selling a call can be quite risky. However, if done right, it’s also very lucrative.
Before you go selling options, you have to make sure the charts are giving that signal. You need to be on the right side of the trade while someone else is not.
Risks On When You Sell a Call
- Since options are a great way to make money without a large account, they’re very popular. In fact, options trading allows you to make money no matter what the market is doing.
- However, when you sell a call, you’re obligated to sell the shares of the stock to the buyer at whatever strike price you agreed upon. That means that if price went up instead of down, the buyer gets cheaper shares and you’re out.
- Many times when placing a trade, your options chain may show you your risk vs reward. You’ll find that the risk in selling 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, selling options has been used as a profitable trading strategy by advanced traders.
Practice Before Using Real Money
Since the strategy to sell a call is risky, make sure you 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? Are you comfortable incurring the risk?
These are all questions you can answer by practicing in a simulated account. That way you’re not risking your money. When stock training, you always want to place many practice trades before using real money.
The Bottom Line
When you sell a call, you’re taking 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.