Why do we generally sell call options? The typical reason to sell call options is because a stock we own is not performing as strongly as we’d like – and we want to increase our returns while we wait. This is a “bullish / neutral” trade strategy and is not developed for bearish trading. Having said that – if we were only considering a short call spread (like a call credit spread) then we would be considering a bearish bias.
Generally – traders sell calls “covered” in some way. This means they are long the stock or they are long a call farther out in time and for both of those trades the trader would want to see the stock price rise.
Options Trading Course
Selling calls on stock, we are bullish on gives us a chance to profit even if the stock is stalled out or just chopping sideways. It lowers our breakeven in the share price and can even set our exit long if we get “run over” (which we’ll explain later in this post).
We do not want to sell a call if we are bearish – as it leaves us exposed to considerable losses if the share price were to fall radically; sure, we’d make a little profit from the premiums collected to sell the call, but the losses from the long call (using a Poor Man’s Covered Call) or the losses from holding the long stock – would be far greater than the profit made in the short call trade.
If we are looking to sell calls with a bearish bias, we would want to use a call credit spread (which we consider a “bearish, neutral” trade), and it would make money if the stock stays sideways or fades lower over time.
Compare the Difference
In the picture below is a call credit spread. In this trade, we are selling a call for more money than we are buying, which means the trade is opened for a net credit in our favor. We would want to see the stock close under 532 at expiration for max credit; as each day goes by, this trade will collect the Theta premiums and slowly lose its value. We would “buy to close” this trade at a lower price than we “sold to open” the trade, and the profit is the difference between them.
In the picture – the call credit spread offers 0.57¢ credit; a common profit target is 50% profit, so we could consider buying this back when it is below 0.27¢.
Sell a Call OTM
That Call Credit spread needs the market NOT to rally higher than the short leg; this is a bearish, neutral trade.
But – when we sell a call, it is nearly always covered. We cover it with long stock or buy a long call that is farther out in time (Poor Man’s Covered Call). In both cases, the losses from the stock going too low would be far greater than the credit we get from selling calls.
But – suppose we had 500 shares of stock in SPY at 531.00, and we sold some calls for 1.50 each. We’ll discuss this from an “at expiration” POV for now. For each call we sold, we collected 1.50 in credit, and at expiration, if the stock is less than 531.00, we keep that credit. Our new B.E. on the stock is 531.00 minus the credit collected (1.50*5 = 7.50) 531 – 7.50 = 523.50) new average share price.
Once we have closed those short calls, we can do it repeatedly, each time reducing our B.E. on the stock average. Most brokers do a poor job of keeping track of these connected values, so journal your trades!
Sell a Call ITM
Ok – that last example only discussed the “at expiration” trade where our calls closed OTM, and we kept the credit & our shares, but – what happens when these options close ITM? We will still get all that credit – but we would also get to sell our shares at the strike we sold (535). So, our average B.E. drops from 531 to 523.50, and THEN we sell the shares for 535 – making a profit of 11.50 for this trade.
We could then buy shares to start the process over, sell some puts until we eventually get assigned shares from those short puts, and then sell calls on the shares until we lose them again.
Selling a call is not bearish, unlike buying a long put. Selling a call is a bullish trade that enhances a long stock trade.
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.
Calls and Puts
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?”
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.
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.
Sell a Call Example
On Jan 2, 2024, I bought 400 shares of IWM for 200.00$ average share price, but I was worried that IWM would stall here and wanted to reduce my average share price while I waited for the stock to recover. I decided to sell four calls ATM – (200 strike calls) and collect $8.70 each.
This trade offered me a “possible” new average share price of 200.00 – 8.70 = $191.30.
But – the stock rallied up, and they were in the money on the day these options were to expire. I could have bought them back for a loss – and kept the stock – but I let the trade go into the close & they were exercised. So – what happened? I sold my shares for 200.00 and made a profit of $8.70.
My goal was to sell calls on these shares for a while – lowering my breakeven on the average shares over time – but in my first short call of the year, they were exercised, and the stock was called away. That is ok – no problem for me – I still made a profit!
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.
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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.
Risk Is On
- 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: Sell a Call
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.
