How to cover a short call option
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. Ashwani Gujral, Chief Market Strategist. They are trading stocks which give you money day on day and you must have stop losses while you trade them. Suggest other news sources for this topic. Related Articles Call option. This article is part of WikiProject Definitions. Consider editing to improve it.
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