Call Option Selling Produces A Steady Stream Of Profits For Stock and Commodity Traders

A seller of options takes the opposite side of the buyer.
For every call buyer there is a call seller (known as the writer of the option). The buyer of the option, unlike the buyer of a stock or futures contract, need not worry about margin calls. However, the seller of the option is generally required to post margin.

Covered Call Writing
If a option trader owns the underlying stock or commodity when he sells (writes) a call option contract it is known as a writing a covered call. For example, the seller of a Treasury bond call option would be covered if he actually owned the cash market U.S. Treasury bonds or was long the Treasury bond futures contract. Or if he owned WYZ stock and sold a call option on WYZ, he would be covered, because he owned the stock.

Uncovered Call Writing
If the call writer, that is the seller of the option, did not hold the underlying stock or commodity, he would have an uncovered or "naked" position. In such instances, margin would be required because the seller would be obligated to fulfill terms of the option contract in the event the contract is exercised by the buyer. It is imperative, therefore, that the seller demonstrate the ability to meet any potential contractual obligations beforehand.

How Does The Seller Of Call Options Expect To Profit
A seller of a call option expects stock or commodity prices to remain relatively stable or to decline modestly. If prices remain stable, the receipt of the option premium enhances the rate of return on a covered position. If prices decline, selling the call against a long futures position enables the writer to use the premium as a cushion to provide downside protection to the extent of the premium received.

Example
For instance, if T-bond futures were purchased at 80-00 and a call option with an 80 strike price was sold for 2-00, T-bond futures could decline to the 78-00 level before there would be a net loss in the position (excluding, of course, margin and commission requirements). However, should T-bond futures rise to 82-00, the call option seller forfeits the opportunity for profit because the buyer would likely exercise the call against him and acquire a futures position at 80-00 (the strike price).

There is risk in call option selling and call option buying. Futures, Options, Stocks and Commodity trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in Stocks, Futures, Options and Commodity markets. Don't trade with money that you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell Futures, Options, Stocks or Commodities.risk disclosure