Exercising Versus Selling

Option premium step

An option premium is the current market price of an option contract. It is thus the income received by the seller writer of an option contract to another party. In-the-money option premiums are composed of two factors: intrinsic and extrinsic value.

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Buying Call Options - Fidelity

Article Reviewed on October 29, Margaret James Updated October 29, A covered call is an options strategy involving trades in both the underlying stock and an options contract. The trader buys or owns the underlying stock or asset.

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They will then sell call options the right to purchase the underlying asset, or shares of it and then wait for the options contract to be exercised or to expire. Exercising the Option Contract If the option contract is exercised at any time for US options, and at expiration for European options the trader will sell the stock at the strike price, and if the option contract is not exercised the trader will keep the stock.

  1. Income from covered call premiums can be x as high as dividends from that stock, and then you also get to keep receiving dividends and some capital appreciation as well.
  2. An Example of How Options Work | Desjardins Online Brokerage
  3. Understanding the Step Premium Option Step premium options are traded over the counterso the parties involved in the transaction can create their own terms.
  4. Option Premium Definition
  5. Covered Calls: A Step-by-Step Guide with Examples

A put option is the option to sell the underlying asset, whereas a call option is the option to purchase the option. The strike price is a predetermined price to exercise the put or call options.

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This allows for profit to be made on both the option contract sale and the stock if the stock price stays below the strike price of the option.

If you believe the stock price is going to drop, but you still want to maintain your stock position, you can sell an in the money ITM call option, where the strike price of the underlying asset is lower than the market value. When selling an ITM call option, you will receive a higher premium from the buyer of your call option, but the stock must fall below the ITM option strike price—otherwise, the buyer of your option will be entitled to receive your shares if the share price is above the option's strike price at expiration you then lose your share position.

Covered call writing is typically used by investors and longer-term traders, and is used sparingly by day traders. Sell a call contract for every shares of stock you own.

One call contract represents shares of stock.

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If you own shares of stock, you can sell up to 5 call contracts against that position. You can also sell less than 5 contracts, which means if the call options are exercised you won't have to relinquish all of your stock position.

In this example, if you sell 3 contracts, and the price is above the strike price at expiration ITMof your shares will be called away delivered if the buyer exercises the optionbut you will still have shares remaining.

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Wait for the call to be exercised or to expire. You are making money off the premium the buyer of the call option pays to you.

What you need to know about cash-covered puts

You can buy back the option before expiration, but there is little reason to do so, and this isn't usually part of the strategy. Risks and Rewards of the Covered Call Options Strategy The risk of a covered call comes from holding the stock position, which could drop in price. Your maximum loss occurs if the stock goes to zero. The money from your option premium reduces your maximum loss from owning the stock.

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The option premium income comes at a cost though, as it also limits your upside on the stock. If you sell an ITM call option, the underlying stock's price will need to fall below the call's strike price in order for you to maintain your option premium step.

An Example of How Options Work

If option premium step occurs, you will likely be facing a loss option premium step your stock position, but you will still own your shares, and you will have received the premium to help offset the loss. Assuming the stock doesn't move above the strike price, you collect the premium and maintain your stock position which can still profit up to the strike price.

If commissions erase a significant portion of the premium received—depending on your criteria—then it isn't worthwhile to sell the option s or create a covered call. Article Table of Contents Skip to section Expand.