How To Sell Stock Options

                      The Basics Of Stock Options

Before we get started on selling options there are some things you should know about selling options.....  

1. There are two types of options you can sell: call’s and put’s.  

2. When you create a call or put options to sell it is call writing (creating) an option contract.  

3. There are two ways to sell call and put options.  The first way is to sell covered call’s and put’s.  The other way is to sell naked call’s and put’s.  

4. Selling options takes away your control.  

5. Options are good way to make quick cash. 

6. There are three types of option contracts you can create: Three month, Six month and Nine month options.   

7. The expiration date of all options is always the third Friday of the option expiration date.  For instance, if the option you sell is suppose to expire in January, it will expire on the third Friday of January.   

8. The options you sell (Write) will always have to be sold in round lots of 100. Meaning, if you sell (Wright) one call or put option, you are selling the right for someone else to either buy (call option) or sell (put option) stock to you.  And you have the obligation to either buy or sell the stock in question to that person. 

9. The strike price of a option is the price that you have agreed to either buy or sell the stock that you sold  the option on. 

10. When the person you sold the option to decides to either buy or sell you the stock, that is called exercising the option.  

11. When you sell options you are called an option seller. 

12. When you sell (Wright) an option contract, you have an obligation to the person you sold the option to. That is, to either buy or sell them stock.

                              Stock Options Explained

There are too types of call option’s you can sell (Wright).  The first is a covered call option and the second is a naked call option.  Now our friend Bob decides to sell a three month covered call with a strike price of $15  (Note: Covered call means that you have the one hundred share’s of stock for your one call option).  The reason Bob wants to sell a three month covered call with a strike price of $15 is because he bought 100 shares of XYZ at $10 a share and now the stock is selling for $11 a share and Bob thinks that XYZ could not possibly go to $15 in three month; so Bob sells his option contract and makes $10.  Now, here are the two things that can happen to Bob. 1 His option contract can expire worthless and he makes $10 profit or, 2 The stock can go over the $15 a share strike price and the person who bought the option from him can exercise their right to buy the stock from Bob for $15 a share.  Of course, Bob makes $10 for the amount he sold his option for plus $15 a share ($15 x 100 share’s of stock = $1500) From the person who buys from bob. So Bob always wins.  In Fact, bob is $10 ahead of all the other people who sold their 100 share’s of stock in the stock market. The only way Bob loses is if his stock goes past the price where he bought it.

Now our friend Tim also decides to sell one three month call option with a strike price of $15 a share.  But unlike bob, Tim does not have 100 shares of XYZ stock. Which means he is selling a naked call option (Note: Naked call means you do not have the 100 shares of stock for your one call option).  Now, the worst thing that could happen to Tim is the stock could go up to one million dollars a share.  But that does not happen.  It only goes to $40 a share so Tim has to buy 100 shares of stock at $40 a share and sell them to the option holder for the $15 a share strike price.  So Tim loses $2500 but that’s all.  

Note: Selling options contracts is always risky.  But if you follow these five simple rules your risk will be at a minimum. 1 Always sell covered call options. 2 Never sell naked call options.  3 Always sell three month covered call options. 4 Never sell six or nine month call options. And 5 It is suggested that you always sell call options a day or two before Christmas because most stock’s go down after the Christmas season.

This Article was brought to you by:

Joshua Fogle

Author of:

(1) How To Make 10% Or More On Your Money

(2) Stock Up On The Stock Market

(3) How To Buy Real Estate With One Hundred Percent Bank Financing

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