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What is the proper way to sell call options to protect a long stock position?
Wiki User
∙ 11y ago
A call option is the right to buy a specific stock at a set price (known as the strike price). for this "Right" to lock in a price, the option buyer pays the seller (also known as the grantor) money which is known as the Option Premium.
Now here's where most folks get tripped up . . .
You can enter the market by Buying the call (go long) or selling the call (grant, go short, or sell).
If you buy the call, your risk is limited to the money that you paid the seller, i.e. the Option Premium. Your potential profit is unlimited, in the sense that if you hold the right to buy Apple at $500, you would continue to make money provided Apple continues to rise.
However, if you are the seller or grantor - you sell a call - your profit is now limited to the Option Premium that you received, and your risk is unlimited. By selling the option you have essentially made a price guarantee on a stock in exchange for a lump sum payment - the option premium.
So some investors utilize what is called "Covered Calls." They buy the underlying stock, say 1000 shares of apple. They are now "long" apple.
Next they "Grant" (sell) call options against their long apple position. They receive the "option Premium" on the calls from the buyer, which is credited in their account.
They are now long the stock, and short the call options.
If apple stays the same or goes down, they owe the option purchaser nothing, and get to keep his money (option premium) once the options expire.
If the price rises, the grantor is a loser on the option, but is covered by his long apple stock position, example - if he bought Apple at 400 and then granted Call options against it at a strike price of 400, if apple goes to 500 he essentially takes his winnings on his Apple Stock, and passes them (covers) his call option losses.
So to clarify, your answer by selling calls against a long stock position, you lock in the option premium, which could essentially act as a limited cushion in the amount of that premium, should the stock price remain unchanged or fall in an amount of less than the option premium received.
Wiki User
∙ 11y ago
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What position in call options is equivalent to a protective put?
An investor who purchases a put option while holding shares of the underlying stock from a previous purchase is employing a "protective put." In other words, you buy a put option on stock you already own.
How can one start to learn about option strategies?
Options Xpress, Trade Monster, Ameri Trade, Investopedia, The Options Guide, Options Playbook, Market Tacker, and Learn Online Stock Options are all sites an individual may visit in order to learn more about stock options and strategies.
Which one has great potential-call option or put option?
Call options allow you to always buy the underlying stock at its strike price before expiration no matter what price the stock is in future and is therefore bought when the underlying stock is expected to go UP. Put options allow you to always sell the underlying stock at its strike price before expiration no matter what price the stock is in future and is therefore bought when the underlying stock is expected to go DOWN. As such, which one has greater potential depends on the prevailing market condition and your general outlook on the trend of the underlying stock. Generally, call options would have more appreciation potential in a bull market and put options would have more appreciation potential in a bear market.
Why do call options with exercise prices greater than the price of the underlying stock sell for positive prices?
Because of the way call options work. If someone was selling calls on $50 stock for $45, that means he would be giving away $5 per share because everyone in the world would buy his $45 stock, immediately sell it for $50, deduct the premium paid and come out with a nice little profit. Stock options are priced using a formula that estimates what the price of a stock should rise or fall to in a certain period of time.
Explain carefully the difference between writing a put option and buying a call option?
When you write a put option, you are player banker to someone betting that the price of a stock is going up. You receive the "bet" in the form of the options premium earned form the person buying the put options from you. If the stock fails to exceed the strike price of the put options by expiration, the buyer has lost the bet and you keep the "bet" money as profit. In this case, your profit is limited to the "bet" money or options premium you received for selling the put options. When you buy a call option, you are buying the right to buy a stock at a fixed price until expiration. If you buy a call option with strike price of $10 and the stock subsequently went up to $50, you can still buy the stock at $10 and then sell it for $50, making the $40 difference as profit. In this case, your profit is only limited to how high the stock rises.
What are stock options in Canada?
Canada stock options don't have the SCC or the regulations that the United States has to protect investors. Also Canada will maker you pay a higher tax rate on the investments you will yield on your returns.
What are the advantages of stock options?
Stock options have many advantages, the pricipal of which is that they are highly versatile and have many potential uses. The can be used to protect a stock or portfolio, the can be used to speculate, and they can be used to produce income. There are many excellent websites available. One good all-around site is http://www.optionseducation.org/. For more specific information about selling options for income go to http://www.safe-options-trading-income.com/
What are the stock to buy options used for?
Stock options can be used for various purposes, including speculation, hedging, and generating income. Speculators use options to gain leverage and potentially profit from short-term price movements. Investors may also use options to protect their existing stock positions against potential losses by hedging. Additionally, options can be used to generate income through covered calls, where investors sell call options against their existing stock holdings.
What is the purpose of free stock options?
Free stock options are often in the form of employee stock options, where an employee is offered stock in the company as a form of non-monetary compensation.
Are there several ameritrade stock options?
There are many ameritrade stock options. They will provide you with their various stock options through there site on the internet. Visit it for more information.
Where can one find information on stock trade options?
One can find information on stock trade options by going to a local stock broker. They will have great advice on everything about the stock trade options.
What are the UK's stock options?
To learn more about where UK stock options are you will have to check UK stock options on Wikipedia to see where and what they are so you can find out more information on where to find them
What is Exercise of Stock Options?
Stock options is when you have a right to buy (or sell, but most commonly buy) a stock at a predetermined price.Exercising a stock option means that you use it: You buy the stocks at the agreed price, and the options expire as you spent them on the stock purchase.
Where can you go to get stock options explained to you?
There are a number of sites where one can get stock options explained. One of these options includes videos that are available on YouTube under the topic of 'Explaining Stock Options Trading'. Another option is 'The Options Guide' website.
Where can I find advice on best stock options?
There are a lot of people that need advice with stock options. There are a few options you can either chat with an online representative or you can get in contact with a stock adviser.
What is the price of a ford stock option for the public?
Any stock website that gives you the price of the stock itself will have a link to the price of the options. For every stock there are many options to choose from ranging in price and date. Study Options Weekly before trading options.
Where can I obtain more information on incentive stock options?
ISO stand for Incentive Stock Options. Which are stock options that can only be offered to an employee and are a tax benefit. There are a variety available. There are a variety of online resources as well, where you can obtain more information on these type of stock options.
