Financial Markets For The Rest Of Us|
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
fully understand them, go ahead and start writing covered calls. It is perhaps the safest way of trading options.
Writing Call Options - Continued
I know describing call options and the follow-up covered and uncovered calls got a bit long-winded, but these concepts are important and I wanted to use as many examples as possible. In conclusion, as you probably already figured out, a call option writer anticipates (or at least hopes) that the underlying stock will stay in the same price range that it is in when the option was written or that it will decline in price. If however the stock price rises, it could eventually reach a break-even point in relation to the proceeds from selling the call; any more after that and the writer would have less profit than if he had not written the options and simply sold the stock.
Writing Put Options
Just like writing call options, writing put options translates into a short position. Unlike writing a call however, the writer of a put anticipates (or hopes) that the underlying stock will increase in value. The put option writer has the obligation to buy the specified number of shares (as determined by the number of contracts sold) at the strike price prior to expiration, should the holder exercises those puts. Take the FMJ option (Ford January 50 put) as an example. If you write 2 FMJ contracts at $2 premium, your proceeds would be $400 (excluding commission). But you would also obligate yourself to buy 200 shares of Ford at $50 prior to the January expiration should the holder decides to exercise those contracts. Now you can see why you would want the stock price to rise when you write put options. Suppose at the time of the writing of 2 FMJ contracts, Ford was trading at $50. If Ford goes up in price to $60 just before expiration, no one is going to exercise those …
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