18 lines
1.1 KiB
Plaintext
18 lines
1.1 KiB
Plaintext
Sell Call
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Selling a call creates the obligation to sell the stock at the strike price. Why
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is a trader willing to accept this obligation? The answer is option premium.
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If the position is held until expiration without getting assigned, the entire
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premium represents a profit for the trader. If assignment occurs, the trader
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will be obliged to sell stock at the strike price. If the trader does not have a
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long position in the underlying stock (a naked call), a short stock position
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will be created. Otherwise, if stock is owned (a covered call), that stock is
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sold. Whether the trader has a profit or a loss depends on the movement of
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the stock price and how the short call position was constructed.
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Consider a naked call example:
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Sell 1 TGT October 50 call at 1.45
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In this example, Target Corporation (TGT) is trading at $49.42. A trader,
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Sam, believes Target will continue to be trading below $50 by October
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expiration, about two months from now. Sam sells 1 Target two-month 50
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call at 1.45, opening a short position in that series. Exhibit 1.3 will help
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explain the expected payout of this naked call position if it is held until
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expiration. |