Uncovered Call Writing

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Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an email.

All selling uncovered call options you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. The subject line of the email you send will be "Fidelity. In return for receiving the premium, the seller of a call assumes the obligation of delivering the underlying instrument at the strike price at any time until the expiration date. This obligation has unlimited risk, because the price of the underlying can rise indefinitely.

Speculators who sell uncovered calls hope that the price of the underlying stock or market index will trade sideways or decline so that the price of the call will decline. Since stock options in the U. Therefore, if an uncovered short call position is open at expiration, it selling uncovered call options highly likely that it will be assigned and a short stock position will be created.

Since speculators who sell uncovered calls typically do not want a short stock position, the writers usually close the calls if they are in the money as expiration approaches. Short calls can be closed by entering a "buy to close" order. The potential profit is limited to the premium received less commissions, and this profit is realized if the call is held to expiration and expires worthless. Selling a call uncovered requires a neutral-to-bearish forecast.

The forecast must predict that the stock price will not rise above the break-even point before expiration. Selling an uncovered call based on a neutral-to-bearish forecast requires both a high tolerance for risk and trading discipline. A high tolerance for risk is required, because risk is theoretically unlimited.

In practice, a sharp price rise can cause very large losses, losses that could exceed account equity. A takeover bid or an selling uncovered call options announcement of good news might cause the underlying stock to gap up selling uncovered call options price, which could result in such a loss. Many traders who sell uncovered calls have strict guidelines — which they adhere to — about closing positions when the market goes against the forecast.

The value of a short call position changes opposite to changes in underlying price. Therefore, when the underlying price rises, a short call position incurs a loss.

Also, call prices generally do not change dollar-for-dollar with changes in the price of the underlying stock. Volatility is a measure selling uncovered call options how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices. As volatility rises, option prices tend to rise if other factors such as stock price and selling uncovered call options to expiration remain constant.

As a result, short call positions benefit from decreasing volatility and are hurt by rising volatility. This is known as time erosion.

Short calls benefit from passing time if other factors remain constant. Stock options in the United States can be exercised on any business day, and the holder of a short option position has no control over when they will be required to fulfill the obligation.

Therefore, the risk of early assignment is a real risk that must be considered. Sellers of uncovered calls, therefore, must consider the risk of early assignment and should be aware of when the risk is greatest.

Early assignment of stock selling uncovered call options is generally related to selling uncovered call options, and short calls that are assigned early are generally assigned on the day before the ex-dividend date. In-the-money calls whose time value is less than the dividend have a high likelihood of being assigned. If a call is assigned, then stock is sold at the strike price of the call. In the case of selling uncovered call options uncovered call where there is no offsetting long stock position, a short stock position is created.

Speculators who sell uncovered calls generally do not want a short position in the underlying stock. It is therefore necessary for such speculators to watch uncovered call positions closely and to close a position if the market moves against the neutral-to-bearish forecast.

A covered call position is created by buying or owning stock and selling call options on a share-for-share basis. In return for receiving the premium, the seller of a put assumes the obligation of buying the underlying instrument at the strike price at any time until the expiration date. Reprinted with permission from CBOE. The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.

Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized Options.

Supporting documentation for any selling uncovered call options, if applicable, will be furnished upon request. Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only. Skip to Main Content. Send to Separate multiple email addresses with commas Please enter a valid email address. Your email address Selling uncovered call options enter a valid email address.

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When running this strategy, you want the call you sell to expire worthless. This strategy has a low profit potential if the stock remains below strike A at expiration, but unlimited potential risk if the stock goes up. The reason some traders run this strategy is that there is a high probability for success when selling very out-of-the-money options.

If the market moves against you, then you must have a stop-loss plan in place. Keep a watchful eye on this strategy as it unfolds. You may wish to consider ensuring that strike A is around one standard deviation out-of-the-money at initiation. That will increase your probability of success. However, the higher the strike price, the lower the premium received from this strategy. Some investors may wish to run this strategy using index options rather than options on individual stocks.

It is not a strategy for the faint of heart. As long as the stock price is at or below strike A at expiration, you make your maximum profit. Risk is theoretically unlimited. If the stock keeps rising, you keep losing money. You may lose some hair as well. The premium received from establishing the short call may be applied to the initial margin requirement.

After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying performs, an increase or decrease in the required margin is possible. Keep in mind this requirement is subject to change and is on a per-contract basis. For this strategy, time decay is your friend. You want the price of the option you sold to approach zero.

That means if you choose to close your position prior to expiration, it will be less expensive to buy it back. After the strategy is established, you want implied volatility to decrease. That will decrease the price of the option you sold, so if you choose to close your position prior to expiration it will be less expensive to do so.

Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies.

Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract.

There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.

The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between.

The Strategy Selling the call obligates you to sell stock at strike price A if the option is assigned. Options Guy's Tips You may wish to consider ensuring that strike A is around one standard deviation out-of-the-money at initiation.

Break-even at Expiration Strike A plus the premium received for the call. Maximum Potential Profit Potential profit is limited to the premium received for selling the call. If the stock keeps rising above strike A, you keep losing money.

Maximum Potential Loss Risk is theoretically unlimited. Ally Invest Margin Requirement Margin requirement is the greater of the following: As Time Goes By For this strategy, time decay is your friend. Implied Volatility After the strategy is established, you want implied volatility to decrease. Use the Probability Calculator to verify that the call you sell is about one standard deviation out-of-the-money. Use the Technical Analysis Tool to look for bearish indicators.