What are the Best Tips for Selling Call Options?

Jim B.
Jim B.
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Selling call options refers to the practice of an investor selling an options contract to a buyer who then has an option to buy 100 shares of the underlying security of the option. Investors can make money from the premium paid for the contract but can lose money if the stock's price goes up significantly and the buyer chooses to exercise the option. Minimizing the risk in selling call options can be achieved by purchasing shares of the underlying security and manipulating the strike price, which is the price at which a call option may be exercised by the buyer. If an investor firmly believes the price of an underlying stock will fall, he may execute a naked sell, which means he sells the option without first purchasing the stock.

Options contracts are a popular tool for experienced traders because they allow investors to speculate on market movement and reap great rewards from successful predictions. Buying call options is a relatively low-risk maneuver, as the investor can lose only the initial premium payment and nothing more. When selling call options, the investor can gain only the premium payment but can lose a lot more if the price of the stock rockets skyward. For that reason, minimizing that risk is crucial when practicing this precarious maneuver.

The best way to minimize risk when selling call options is to practice a covered call sell. This means that the investor has shares of the underlying stock herself and is therefore able to benefit from a price rise. By having the stock as a hedge, the investor can withstand the buyer of the call contract exercising his option to buy the shares.

Adjusting the strike price, which, when added to the premium, is the price at which the buyer of a call option begins to make a profit, can also protect the investor selling covered call options. If the investor believes the price of the underlying security will be steady, he should keep the strike price close to the current price, which allows him to command a higher premium. On the other hand, if the investor is unsure about the stock's ability to rise, he should mitigate his risk by raising the strike price.

If an investor is absolutely positive that the price of a security is going to drop, then she may wish to try a naked call sell. Of all methods of selling call options, this is the riskiest. Only experienced investors should execute this maneuver, as the seller will be on the hook to buy the shares of the stock to fulfill the option if the buyer chooses to exercise it. This can be extremely costly if the price of the stock far outstrips the strike price.

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