Selling covered calls implies a prediction or belief that a particular stock price will remain the same or increase within a finite period of time. The most common length being a 3 month option. Profiting from such a prediction is the motivation why the holder of a stock will consider writing or selling a covered call option. The same, but opposing viewpoint is held by the buyer of that same option.
These functions combine together, and allows two different beliefs about where the future value of the stock is heading, to bet upon. It may seem unclear at first glance, but once the basic's are understood, then the benefit and the utility behind options emerge, along with the practicality and ability to hedge risk or create it.
Commodities and the trading of them was how it all began. To more readily understand call options and modern stock option trading, a brief history of how they evolved helps to put it into perspective. Buyers of a agricultural product, be it cattle or other livestock, and products such as corn, wheat, soybeans, rice, and many others feared a loss of supply or a rise in price.
The producer wanted to assure that the value of his commodity did not fall. This hedging by means of a futures contract provided just that mechanism. Both sides of the coin wished to protect their interests out into the future. This gave rise to the options market as we know it today.
Commodities markets still serve this function and the largest market in the USA for the exchange of such well known and beloved staples such as pork bellies, orange juice concentrate and cotton bales is the Chicago board of exchange, known as CBOE. This very same exchange was instrumental in helping to create and regulate options trading based on stocks and bonds.
Most options are never exercised in the physical sense where the under-lying stock actually changes hands. It most often is strictly a paper transaction. It is impractical to carry the transaction to it end, so most often it is simply traded out from or covered by an opposing position. When a covered call option expires un-exercised, then there is an unhappy buyer and a very happy seller.
The seller or writer of a covered call option is offering to sell an obligation. This is a commitment to sell at a certain price, a specific number of shares, up to a certain date into the future at which time it expires. This obligation is expressed in amounts of 100 shares, referred to as a contract. Ten contracts equal a thousand shares, and so on.
An important aspect to grasp in a more legal sense requires awareness of what's being conveyed. The writer and seller of the covered call options contract is taking on an obligation. The buyer of that contract is purchasing a right.The standard unit of purchase is 100 shares. One contract has 100 shares, 3 contracts represents 300 shares.
The are two ways in which a seller of covered calls can hope to profit from his options contract.One way is to plan on selling the options on a stock before he owns it, thus the income from the sale of the contract he wrote reduces his cost of purchasing the stock. The second way is employed by many sellers of covered call options contracts, which is to sell a contract and hope that is will expire. This allows them to keep the income from when they sold the contract. It is another way to make a profit other than earnings, dividends, or a rise in stock price that you sell into.
These functions combine together, and allows two different beliefs about where the future value of the stock is heading, to bet upon. It may seem unclear at first glance, but once the basic's are understood, then the benefit and the utility behind options emerge, along with the practicality and ability to hedge risk or create it.
Commodities and the trading of them was how it all began. To more readily understand call options and modern stock option trading, a brief history of how they evolved helps to put it into perspective. Buyers of a agricultural product, be it cattle or other livestock, and products such as corn, wheat, soybeans, rice, and many others feared a loss of supply or a rise in price.
The producer wanted to assure that the value of his commodity did not fall. This hedging by means of a futures contract provided just that mechanism. Both sides of the coin wished to protect their interests out into the future. This gave rise to the options market as we know it today.
Commodities markets still serve this function and the largest market in the USA for the exchange of such well known and beloved staples such as pork bellies, orange juice concentrate and cotton bales is the Chicago board of exchange, known as CBOE. This very same exchange was instrumental in helping to create and regulate options trading based on stocks and bonds.
Most options are never exercised in the physical sense where the under-lying stock actually changes hands. It most often is strictly a paper transaction. It is impractical to carry the transaction to it end, so most often it is simply traded out from or covered by an opposing position. When a covered call option expires un-exercised, then there is an unhappy buyer and a very happy seller.
The seller or writer of a covered call option is offering to sell an obligation. This is a commitment to sell at a certain price, a specific number of shares, up to a certain date into the future at which time it expires. This obligation is expressed in amounts of 100 shares, referred to as a contract. Ten contracts equal a thousand shares, and so on.
An important aspect to grasp in a more legal sense requires awareness of what's being conveyed. The writer and seller of the covered call options contract is taking on an obligation. The buyer of that contract is purchasing a right.The standard unit of purchase is 100 shares. One contract has 100 shares, 3 contracts represents 300 shares.
The are two ways in which a seller of covered calls can hope to profit from his options contract.One way is to plan on selling the options on a stock before he owns it, thus the income from the sale of the contract he wrote reduces his cost of purchasing the stock. The second way is employed by many sellers of covered call options contracts, which is to sell a contract and hope that is will expire. This allows them to keep the income from when they sold the contract. It is another way to make a profit other than earnings, dividends, or a rise in stock price that you sell into.
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Learning the top option trading strategies will assist you to be a successful market trader. Covered calls make it easy to protect your investment.
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