Can I sell a call option

[CXMelga 0]

Hello,

I am a beginner and would be grateful if someone could help me understand the following

So, you either buy or sell options (or a combination there of).

I can understand if I sold an option (sell to open) for a premium I could sell the option (buy to close) some where down the line (before expiration) to lock in a partial profit.

I saw a video (cannot recall the link) where if I understood it correctly was suggesting  I could sell a call option (that I had previously purchased) and take a partial profit similar to the above, however I am not sure I understand this concept 

So lets say I buy a call option for $200 premium ($2 per share) for XYZ stock at a strike price of $110 (XYZ trading at $100) for 30 days

As time goes by my option contract is worth less every day, therefore I do not see how I could sell my option for a profit say $250, unless the market price of XYZ stock goes to say $108 and there is 15 days left on the contract, someone else in the market may think XYZ  will pass $110 (as it is already close now trading at  $108) and therefore be willing to buy my contract for a premium of $250 ($2.5 per share) even though time decay has eroded it some what. that how it works?

in other words even though time decay has made my option less valuable the fact the stock price is much closer to the strike price makes my option more attractive and therefore more valuable (event after taking into account the time decay) 

Or am I going off in the wrong direction here ?

Thanks very much in advance

CXMelga

 

[Kim 7,513]

You can buy to open and sell to close, or sell to open and buy to close any option at any time. If you sell a call option, you need the stock to trade below the strike at expiration to make a profit. or you can close it at any time if the stock cooperates. Your P/L will depend on stock price, volatility and time to expiration.

[Topcat 7]

CXMelga, 

There are a number of cheat sheets out there but this speaks to what Kim just outlined:

 

Options directions:  An easy way to remember the difference between puts and calls is that a call gives you the right to “call in” a winning stock, while a put gives you the right to “put off” a bad stock on someone else.  But more specifically: 

 

Selling a call = you are obligated to sell stock at strike price to buyer AND you are ONLY obligated to sell stock at the strike price IF THE OPTION OWNER ELECTS TO BUY THE STOCK (because it is higher.) Many times options expire and become worthless. (get premium or cash)

 

Buying a call = you have the exercisable right but not obligation to buy stock from the seller at strike price

 

Selling a put = you are obligated to buy stock at strike price from buyer if price of stock is at put price or lower-if higher it expires worthless (get premium or cash)

 

Buying a put = you have the exercisable right but not obligation to sell stock to the buyer at strike price

 

 

Edited October 25, 2018 by Topcat

[CXMelga 0]

Hello Kim, thanks once again for taking the time to reply, 

It is easier for me to understand how I can make a profit when I start of selling an option and then buying it back at a cheaper price later on (my brain gets that)

When I start off by guying a call option (e.g. first trade in X stock)  it is harder to understand but I think I go it now, what I am thinking is in order to make a profit in this situation (where time decay is against me) it is all about the 'extrinsic value'

In other words if I start of by buying an OTM call option and assuming it stays OTM (obviously I could make a profit if it went from OTM to ITM)  event though time decay is eroding the value of my option and the intrinsic value is 0 (as OTM) if the stock price moves very close to the strike price the extrinsic value could increase to a point whereby if I sold it this extra extrinsic value alone could be enough for me to see a profit in selling the call option (as I originally brought the call option when the extrinsic value was mush lower)

Is that it in a nut shell when it comes to buying (first) and selling (second) an OTM option ? (apart from hoping it goes ITM) 

Thanks again, I just keep reading and watching videos and asking questions so I will understand it well enough at some point

Cheers

CXMelga

 

[CXMelga 0]

thanks too Topcat   what do you think if my last post, is my thinking regarding the importance of extrinsic value correct in the situation I describe above?

CXMelga

[Edwin 63]

Time value decays slower in reality than perhaps your perception of it.  You should be thinking of volatility (vega) is as important to the options price as theta.  Perhaps, rather than thinking about the theoretical definitions of options terms, look at how options pricing changes in actual charts (you can do this easily in ThinkorSwim or IB).  Paper trade some strategies and gain experience from that, but also take it with a grain of salt, because the fills are not at actual prices where you'd get filled at in a live market due to slippage and wider bid/ask spreads.  The Analyze Tab in TOS (there are similar tools in other platforms) will better help you visualize what happens over time in the situations you listed in your questions.  You can't just assume that you'll win most of the time because you are selling time decay, and that time moves forward.  Selling calls naked has unlimited loss (theoretically) if the equity keeps going up.  You want to look at spreads (credit spreads, debit spreads, calendars, iron condors, etc.) and analyze how those trades perform in times of low and high volatility.  If you want to sell options, then start off with something basic like a covered call or selling puts to get long a stock.

Again, look at volatility (vega), options liquidity (how wide the bid-ask spreads are) in getting actual live fills, and doing research on trading platforms and brokers with reasonable commissions rates.  These items are often overlooked by beginners.  Don't get too hung up on the definitions on who has obligation to do what, and get hung up on why someone else would buy or sell the option you want to trade (it's completely meaningless to even think about that). You'll learn a lot faster and more if you look at actual markets than get bogged down on the theory of how things work according to a book (especially if you don't take into consideration vega, and mainly focus on delta and theta), and also worry about options assignment (most options trades are open and closed before expiration or assignment since you can buy and sell whenever you want)