Yes. You can sell your call options contracts to another willing buyer any time before the trade period elapses. You can sell the call options contract to another buyer at the current market value or price of the said contract. If the value of the underlying asset declines or remains unchanged, the call option’s worth will reduce as it gets close to the expiry period.
The Basics of a Call Option
When it comes to call options, the buyer possesses the right to purchase a financial vehicle at a predetermined hit price. Note that the buyer is not obligated to do so, though.
What is a call option?
A call option is a financial construction that gives the option purchaser the right, but not the obligatory duty, to purchase a commodity, bond, stock, or a financial instrument or asset at a specified stock price within a given period. The underlying asset can be a commodity, bond, or a stock. When the price of this asset goes up, the option buyer will profit.
A call option differs from a put option. More specifically, a put is an option meant to be sold, while a call is an option to buy.
In other words, a put option gives the holder the right to sell the commodity, stock, or other underlying asset at the pre-agreed option’s strike price prior to or on expiration.
If the call buyer agrees to exercise their option to purchase, the seller of the option is compelled to sell the security to them. The option buyer can exercise the option at any time before the expiration date. The expiration date might be three, six, or even a year in the future.
The seller receives the option’s purchase price, which is determined by how near the option strike price is to the underlying security’s price at the time the option is acquired, as well as how much time remains until the option’s expiry date. In other words, the option’s price is determined by how likely or unlikely it is that the option buyer will be able to economically exercise the option before it expires.
Options are typically traded in quantities of 100 shares. The buyer of a call option hopes to benefit if and when the underlying asset’s price rises to a level greater than the option strike price.
The seller of a call option, on the other hand, anticipates that the asset’s price will fall, or at the very least never rise as high as the option strike/exercise price before it expires, in which case the money received for selling the option will be pure profit.
If the price of the underlying security does not rise beyond the strike price before expiration, it will be unprofitable for the option buyer to exercise the option, and the option will expire worthless or “out-of-the-money.” The buyer will incur a loss equivalent to the cost of the call option. Alternatively, if the underlying security’s price increases over the strike price of the option, the buyer can financially exercise the option. It is all about knowing when to exercising your selling options.
Short Versus Long Call Options
Short call option:
As its name indicates, a short call option is the opposite of a long call option. In a short call option, the seller promises to sell their shares at a fixed strike price in the future. Short call options are mainly used for covered calls by the option seller, or call options in which the seller already owns the underlying stock for their options. The call helps contain the losses that they might suffer if the trade does not go their way.
For example, their losses would multiply if the call were uncovered (i.e., they did not own the underlying stock for their option) and the stock appreciated significantly in price.
A long call option is simply a call option in which the buyer has the right, but not the duty, to purchase a stock at a striking price in the future. The benefit of a long call is that it allows you to prepare ahead of time to buy a stock at a lower price. For example, you may buy a long call option in advance of a noteworthy event, such as a company’s earnings call.
While the earnings from a long call option are infinite, the losses are restricted to the premiums paid. Thus, even if the firm does not announce a favorable earnings beat (or one that falls short of market expectations) and the price of its shares falls, the maximum losses that can be incurred are limited.
Types of Call Options
- Buy-Write Call or Covered Call Option – This is when you sell a call option on a stock that you own. “Covered call writing is a highly cautious investing technique and a means to create additional income,” explains Creighton University finance professor Robert R. Johnson. “A covered call writer is essentially trading some upward potential in return for higher present revenue. This is especially beneficial for individuals who are nearing retirement and looking for additional income.” You might already own the stock or purchase it when you write (sell) the option.
- Naked call – With naked call option, the holder doesn’t actually own the stock, commodity, or underlying asset to start with.
- Sell to close call option – This is a type of call option in which the initial buyer chooses to sell the option to exploit the underlying asset.
Pros of Selling a Call Option
- It provides an extra stream of income
- The selling activity is repeatable and profitable each time when done correctly
- The call option’s premium is guaranteed
Cons of Selling a Call Option
- You can potentially incur numerous losses
- The profits are limited
- You cannot sell the stock, commodity, or underlying asset
How much money do I need to sell options?
Around $6,000 is how much you need to sell options. That is because call options usually range in value from $4,000 to $10,000. And since you need to purchase a minimum of 100 shares, you need to set aside a minimum of $5k for any given stock that retails at a minimum of $50 a share.
What happens if no one buys your option?
The direct answer is you will lose everything. The call option will reduce more and more in value as the expiration date nears. When the maturity period elapses and no one buys your option, it will become worthless and has no value to you. No one can call or buy if the stock value is worth less than the strike at the expiry date.
When should I sell my call option?
A call option gives you (as a buyer) the right and not the obligation to purchase the underlying asset at the strike price of the option contract. So, you should sell your call option if your overall goal on the particular asset is that it will fall in value.