While they may seem complicated, options can be a good way to hedge investments in your stock portfolio. An option contract gives the owner the right to purchase (or sell) stock in a company at a specific price (called the "strike price") on a specific date (called the "expiration date"). Selling call options on a stock you already own can give you immediate cash without having to sell your shares.
Identify a stock in your portfolio in which you own at least 100 shares. The stock should be one that you do not want to immediately sell, but believe may increase in value over time. Options contracts are only traded in increments of 100 shares so you must have at least that amount to sell a call option on those shares. The buyer of your call option will pay you cash now for the right to buy your shares at a future date.
Decide how much you want to sell your call option for. The price that a call option will fetch in the market is determined by several factors, but the future of the underlying stock is the most important one that investors will consider when buying your option. If investors believe the price of your shares will rise in the future, they may pay you a premium for the right to purchase those shares at a specific date.
Call your broker and inquire about selling call options on your shares. Call options have several components including the strike price, the expiration date and the price another investor is willing to pay you for the contract. Your broker will be able to determine the current market for your options and suggest how much you can get for your call option and the appropriate strike price.
Discuss the risks of selling call options with your broker including how much the broker charges in commission for executing an options trade. Consider the risks of holding onto your underlying shares without selling a call option. Also, consider how much profit you could forgo if the underlying stock rises above what you sell your call option for. In that case, the investor who bought your call option would have the right to buy your shares at less than the current market value.
Tell your broker to execute the call option trade after confirming he has the correct strike price and expiration date you want.
Several online brokerage accounts have low-cost options trading, but require that you have a specific amount of cash available in order to qualify for options trading.
- "An Investor's Guide to Trading Options"; Virginia B. Morris; 2004
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