Now, we turn our attention towards “sellers” perspectives.
Call Option
Sell Call: When an investor sells a Call, he is selling the right to Call buyer, or granting the Call buyer the right to buy 100 shares of the underlying stock at the striking price from him, any time prior to the expiration. Another way of putting it is the seller is obligated to sell 100 shares of the underlying stock to the Call buyer at the strike price.
In contrast to the Call buyers, Call sellers collect the premiums.
Example 1:
Mr. A sells “1 AIG Aug 12 Call at $1.50”.
Mr. A is selling the right to the Call buyer, say Mr.B, to purchase 100 shares of AIG at the price of $12/share between the point of transaction till the expiry date from Mr. A.
The call seller, Mr. A would collect the $1.50/share (the premium).
Suppose at the end of the expiration, AIG stock was traded at $10/share, the option would expire worthless and the Call seller, Mr.A, would earn the full premium.
So a Call seller is bearish on the stock. He will earn the full premium if the shares expire below the strike price.
Uncovered Calls/Covered Calls
When you sell a call but you do not own 100 shares of the underlying stock, this option is call “naked option”; “uncovered option” or “uncovered call”. This type of trade is extremely risky as the share price could have unlimited up side.
Given the earlier example:
Mr. A sells “1 AIG Aug 12 Call at $1.50”.
Suppose the share of AIG has gone up to $30/share. The buyer exercises the option. Mr. A needs to buy 100 shares of AIG from the market at $30/share and sell them to the Call buyer at $12/share.
Thus for Call seller, it is always good to own 100 shares of the underlying stock.
So when you own the 100 share of the underlying stock and when you sell the Call, you are covering your position. Such trade is called “Covered Calls”
Put Option
Put Option
Sell Put: When you sell a Put, you are granting the Put buyer to sell you 100 shares of the underlying stock at the strike price. Should the Put is exercised, you are obligated to buy 100 shares from the Put buyer.
Put sellers collect premium.
Example 2:
Mr. A sells “1 AIG Aug 12 Put at $1.50”.
Mr. A is granting the Put buyer to sell him 100 shares of AIG at $12/share.
Suppose at the end of the expiration, AIG stock has risen to $15/share. The option would expire worthless and Mr.A would collect the full premium.
Thus, Put seller is bullish on the stock. He hopes that the share price would close above the strike price, thus the option would expires worthless so that he could collect the premium.
Posts
