Call Writing Explained

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Options Explained

Having options explained to you doesn’t have to be difficult or confusing. If you read the first few pages of this tutorial you should get a good understanding of how they work. First, some put and call option basics explained:

However, options are quoted on a per-share basis so when you see an option price quoted at $1.50 that means it’s $150 per option contract (because each contract controls 100 shares).

If you owned 100 shares of stock, you could sell 1 call option against it and receive $150.

If you owned 500 shares of stock, you could sell 5 call options against it (not 500 call options) and receive 5 x $150, or $750.

Likewise, if you own less than 100 shares of stock you can’t create a covered call position from it.

Options (calls and puts) have 3 attributes to identify them:

  1. the underlying stock they represent
  2. the expiration date
  3. the strike (or exercise) price

Monthly options expire on the Saturday after the 3rd Friday of their expiration month. No reason. They just do. The last day they trade is the day before they expire (i.e. they stop trading on the 3rd Friday of the month).

Strike prices are generally available in $5 increments, or in $2.50 increments for lower priced stocks, or in $10 increments for high priced stocks. Some heavily traded stocks have strikes in $1 increments. (You don’t need to remember this; we’ll show you all of the available choices in our tables; that’s just the kind of top-notch firm we are.)

There are 583,293 call options available today with different combinations of stock, month, and strike price, but for some stocks, some months, and some strike prices, there are no options available. The Chicago Board Options Exchange decides which options are available. You will see “-” in our tables if an option is not available.

Another way to have call options explained when you’re done with this tutorial is to read through our covered call blog. It explains stock options with several examples.

Writing Call Options

Writing Call Options

Selling Call Options

Selling Covered/Naked Calls

Explanation of Writing a Call Option (Selling a Call Option):

If you understand that when you buy a GOOG $600 call option that you have the right to buy 100 shares of GOOG at $600, then you have probably asked yourself the question of “who exactly am I buying it from?” In order to have the right to buy the stock at the strike price, then somebody has had to take the other side of that transaction and agreed to give you the right to buy it from them. That person that takes the opposite side of the call option buyer is the “call option seller.” (Sometimes it is referred to as the “call option writer”.)

Just to be clear here, there are really two types of call option selling. If you bought a call option and the price has gone up you can always just sell the call on the open market. This type of transaction is called a “Sell to Close” transaction because you are selling a position that you currently have. If you do not currently own the call option, but rather you are creating a new option contract and selling someone the right to buy the stock from you, then this is called “Sell to Open”, “Writing an Option”, or sometimes just “Selling an Option.”

Definition of Writing a Call Option (Selling a Call Option):

Writing or Selling a Call Option is when you give the buyer of the call option the right to buy a stock from you at a certain price by a certain date. In other words, the seller (also known as the writer) of the call option can be forced to sell a stock at the strike price. The seller of the call receives the premium that the buyer of the call option pays.

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If the seller of the call owns the underlying stock, then it is called “writing a covered call.” If the seller of the call does NOT own the underlying stock, then it is called “writing a naked call.” Obviously, in this instance it is “naked” because the seller does not own the underlying stock. The best way to understand the writing of a call is to read the following example.

Example of Writing / Selling a Call Option:

It’s January 1st and Mr. Pessimist owns 100 shares of GOOG stock that he bought 5 years ago at $100. The stock is now at $600 but Mr. Pessimist thinks that the price of GOOG is going to stay the same or drop in the next month, but he wants to continue to own the stock for the long term. At the same time, Mr. Bull just read an article on GOOG and thinks GOOG is going to go up $20 in the next few weeks because GOOG is about to have a press release saying they expect their China traffic to be very strong for the year.

Mr. Pessimist gets a quote on the January $610 call on GOOG and sees the price at bid $5.00 and ask $5.10. He places an order to SELL 1 GOOG January $610 call as a market order. Mr. Bull also places a market order to BUY the very same GOOG option contract. Mr. Pessimist’s order immediately gets filled at $5.00 so he receives $500 (remember each option contract covers 100 shares but is priced on a per share basis) in his account for selling the call option. Mr. Bull immediately gets filled at $5.10 and pays $510 for the GOOG January $610 call. The market maker gets the $10 spread.

Once the trade is made, Mr. Pessimist hopes that GOOG stays below $610 until the third Friday in January. Meanwhile, Mr. Bull is hoping that GOOG closes well above $610 by the third Friday in January. If GOOG closes at $610 or below then the call option will expire worthless and Mr. Pessimist profits the $500 he received for writing / selling the call; and Mr. Bull loses his $510. If GOOG closes at $620, then Mr. Bull would exercise the call option and buy the 100 shares of GOOG from Mr. Pessimist at $610. Mr. Pessimist has now received $500 for writing the call option, but he has also lost $1000 because he had to sell a stock that was worth $620 for $610. Mr. Bull would be happy in that he spent $510, but he made $1000 on the stock because he ended up paying $610 for a stock that was worth $620.

I noted earlier that 35% of option buyers lose money and that 65% of option sellers make money. There is a very simple explanation for this fact. Since stock prices can move in 3 directions (up/down/sideways) it follows reason that only 1/3 of the time will the stock move in the direction that the buyer of the stock or the buyer of the put wants. Therefore, 2/3 of the time the seller of the option is the one making the money!

To think of this another way, think of option trading as the turtle and the hare story.

Option buyers are the rabbits that are generally looking for a quick move in stock prices, and the option sellers/writers are the turtles that are looking to make a few dollars each day.

In the YHOO examples above we said that if YHOO is at $27 a share and the October $30 call is at $0.25 then not many option traders expect YHOO to climb above $30 a share between now and the 3 rd Friday in October. If today was October 1 st and you owned 100 shares of YHOO, would you like to receive $25 to give someone the right to call the stock away from you at $30? Maybe, maybe not.

But if that October $30 call was currently trading at $2 and you could get $200 for giving someone the right to call you stock away at $30, wouldn’t you take that? Isn’t it very unlikely that with only a few weeks left to expiration that YHOO would climb $3 and your YHOO stocks would be called away? In effect, you would be selling your shares for $32 (the $30 strike price plus the $2 option price).

Option sellers write covered calls as a way to add income to their trading accounts by receiving these little premiums each month, hoping that the stock doesn’t move higher than the strike price before expiration. If the October calls expire worthless on the 3 rd Friday in October, then the immediately turn around and sell/write the November calls.

When you own the underlying stock and write the call it is called writing a covered call. This is considered a relative safe trading strategy. If you do not own the underlying stock, then it is called writing a naked call. This is considered a very risky strategy so don’t try this at home!

Important Tip! The reason that option sellers/writers usually win on their trades is they have one very important factor on their side that the option buyer has working against them—TIME.

If today is October 1 st and YHOO is at $27 and we write the YHOO $30 call to receive $2.00, we have 21 days to hope that YHOO stays below $30. Each day that goes by and YHOO stays below $30, it become less and less likely that YHOO will pop over $30 so the option price starts decreasing. On October 10 th , if YHOO is still at $27 then the October $30 call would probably be trading at $1.10 or so. This is called the “time decay” of options in that each day that goes by the odds of a price movement become less and less.

This is the turtle winning the race!

Here are the top 10 option concepts you should understand before making your first real trade:

How to Correct English Writing Errors

E nglish writing can be difficult if the writer does not make use of the many English language writing resources that are available to help them. Writers can use dictionaries, style guides, spell checks, show the writing to friends, fellow students and of course their English language teachers.

How to correct English writing Errors?

The most obvious answer is teacher correction. But is teacher-correction effective? There is some research that shows English language students do not make effective use of teacher-corrections.

Every English writing teacher would like to imagine that their student takes their corrected paper home, pulls out a dictionary and grammar book and carefully goes over each correction. Unfortunately, most students only check to see how much “red” is on the paper and then file it away – never to be looked at again.

Most of the teacher’s careful written corrections are actually wasted.

Error correcting takes lots of teacher time and energy and many students just do not want to see their writing compositions after teacher corrections.

Beware of the student who forgot the homework and just before the homework is due dashes off a quick paper. He makes a lot of mistakes all made in haste. The problem is that the student wants his paper to be corrected and correcting it takes four times the effort to read the “mess with multiple errors”. Your policy should be: if the student does not have time to try to write it well, then you do not have time to try to correct it.

John Truscott and later Krashen have presented research indicating that grammar correction does not really help students at all.

Personally, I have seen that my students do learn from some corrections.

Except for typos and simple errors, self-correction is very difficult for English students because if they understood what was wrong they would not have written it in the first place.

One to One peer correction is not fun and it is difficult for many students to fully trust their partner’s language experience or writing ability.

How can the student add to his English writing skills in a way that interacts with his previous English grammar knowledge and vocabulary?

One of many new methods is called Group writing.

Group writing

Group writing helps students to benefit from several peers, helps students to learn not only from their mistakes but from the mistakes of others and makes economical and efficient use of the students’ and the teacher’s time.

The group writing tasks are everything from writing a paragraph to writing an essay.

Each group can get a different topic to work on or sometimes it can be the same topic and they compete with the other groups.

You can use the whiteboard, the large paper paper pads on an easel or overhead projector as long as there is one per group. One student writes while the rest of the team from one to three others offers suggestions and corrections during the writing process.

Group writing gets the students to benefit from group assistance as a peer-learning experience with more resource value than one to one peer sharing.

With the entire class looking on we examine each finished writing sample and I ask the class to offer corrections. The class really focuses on every group finished writing to see if it is correct or not. Especially if there is challenge or competition at stake.

Group writing seems to be an effective method of correcting English writing errors. Immediate feedback is quick within the groups and again when corrections are suggested in front of the entire class.

Written by Ross McBride – Career Teacher and Coach

Writing Call Options | Payoff | Example | Strategies

What is Writing Call Options

Options are one of the derivative instruments used in the world of finance in order to transfer risk from one entity to another and also can be used for hedging or arbitrage or speculation. By definition, Call options are a financial instrument which gives its holder (buyer) the right but not the obligation to buy the underlying asset at a predetermined price during the period of the contract.

In this article, we discuss about writing call options in detail –

Writing Call Options

Writing call options also called as selling the call options.

As we know that call option gives a holder the right but not the obligation to buy the shares at a predetermined price. Whereas, in writing a call option, a person sells the call option to the holder (buyer) and obliged to sell the shares at the strike price if exercised by the holder. The seller in return receives a premium which is paid by the buyer.

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Writing Call Options Example

Suppose two investors, Mr. A and Mr. B have done their research on the shares of TV Inc. Mr. A has 100 shares of TV Inc in his portfolio and currently TV Inc is trading at a price of $1000/-. Mr. A is pessimistic about the shares and feels that in one month’s time, TV Inc is going to trade at the same level or it will drop from its current level and therefore wants to sell a call option. However, he wants to retain TV Inc’s shares in his portfolio for a long term. Hence, he places a sell of a call option on TV Inc for a strike price of $1200/-, at a premium of $400/-($4/per share) and a maturity of next one month. Lot size of one contract we assume here as 100 shares.

On the other side, Mr. B feels that TV Inc’s share is going to rise from $1000/- to $1200/-. And therefore, he wants to buy a call option. However, he does not wish to increase his portfolio as of now. Hence, he put his order to buy a call option on TV Inc for the strike price of $1200/-, at a premium of $400/- and maturity period of next one month.

Mr. A found that someone has quoted a buy on call option with a bid price of $400/- for the strike price of $1200/-. He accepted the order and call option contract between the two got finalized.

During the maturity period, the price of TV Inc’s shares soars to $1300/- and hence Mr. B has exercised his call option (since the call option is in the money). Now, as per the contract Mr. A has to sell 100 shares of TV Inc at a price of $1200/- to Mr. B, which would in turn profitable for Mr. B as he can sell the shares at $1300/- in the spot market.

Here, Mr. B purchased the shares of TV Inc at a price of $1200/- which was worth $1300/- in the spot market. Whereas, Mr. A has earned $400/- as premium while writing the call option but had to sell the shares at $1200/- which was worth $1300/-.

In our example, an obvious question comes to our mind that if Mr. A feels that the shares of TV Inc are going to drop from its current level then he could have bought put option instead of selling a call option. In the case of buying put option instead of writing a call option, he (as a holder) had to pay the premium and would have lost the opportunity to earn the premium by way of selling a call option.

With the above example, we can conclude that while writing call option, the writer (seller) leaves his right and obliged to sell the underlying at the strike price, if exercised by the buyer.

Payoff for writing call options

A call option gives the holder of the option the right to buy an asset by a certain date at a certain price. Hence, whenever a call option is written by the seller or writer it gives payoff of either zero since the call is not exercised by the holder of the option or the difference between strike price and stock price, whichever is minimum. Hence,

Payoff of short call option = min(X – ST, 0) or – max(ST – X, 0)

We can calculate the payoff of Mr. A with the available details assumed in the above example.

Had the share price of TV Inc been moved to $1100/- and end up out of the money, the pay-off for Mr. A would have been as follows

Strategies involved in writing call options

In the above example we have observed that Mr. A (writer of the call option) owns 100 shares of TV Inc. So when the option contract was exercised by Mr. B (buyer of the call option), Mr. A had to sell the shares to Mr. B and closed the contract. But there would be a scenario wherein the underlying is not owned by the seller or he is simply trading on the basis of his speculation. This argument gives space for Option Trading strategies involved in writing call options.

The strategy of writing call options can be done in two ways:

  1. writing covered call
  2. writing naked call or Naked short call

Let’s now discuss these two strategies involved in writing call options in details.

#1 – Writing Covered Call

In writing covered call strategy, the investor writes those call options for which s/he owns the underlying. This is a very popular strategy in writing option. This strategy is adopted by the investors if they feel that stock is going to fall or to be constant in near term or short term but want to hold the shares in their portfolio.

As the share prices fall, they end up with earning as premium. On the other hand, if the stock price rises, they sell the underlying to the buyer of call options.

In the above example, we have seen that Mr. A has written a call option on TV Inc shares which he is holding and later sold the same to the buyer Mr. B since the share prices were not moved as per his expectation and call option ended in the money. Here, Mr. A has covered his position by holding the underlying (shares of TV Inc). But had the share prices been moved as per his expectations and fallen down, he would have earned a net pay-off of $400/- as premium. However, incase of a buyer, if share prices move up as per his expectation he can earn unlimited profit theoretically.

In this way, the writer limits his losses by the difference between strike price at which the underlying is sold and premium earned by shorting or selling the call option.

Writing Covered Call Example

An investor has written the covered call option and at the time of expiry, the stock price rose to $1600/-.

Payoff for the seller is as below:

  • Pay-off = min(X – ST, 0)
  • = max(1500 – 1600, 0)
  • = -$100/-
  • Net Payoff of writer = 400 – 100 = $300/-

#2 – Writing Naked Call or Naked short Call

Writing naked call is in contrast to a covered call strategy as the seller of the call options does not own the underlying securities. In other words, we can say that when the option is not combined with offsetting position in the underlying stock.

In order to understand this, let’s think other side of the transaction in call options where a person has written a call option and leaves the right to buy (or obliged to sell) a certain amount of share at a certain price but does not own the underlying securities. This strategy is basically adopted by the investor when they are very speculative or think that share prices are not going to move upward.

In this type of strategy, the seller earns through premium paid by the buyer. However, the losses would be unlimited theoretically, if share prices move upward and exercised by the buyer. Therefore, there is limited profit with a huge potential of upside risk.

Further, the payoff for writing naked call options would be as similar as writing covered call. The only difference is at the time of exercise by the buyer, the seller has to purchase the underlying from the market or alternatively has to borrow the shares from the broker and sell it to the buyer at the strike price.

Writing Naked Call Example

Let’s assume shares of ABC is currently trading at $800/- and the call option for a strike price of $1000/- with a maturity of one month and premium of $50/-. Here, I can sell a naked call (suppose I am not owing shares of ABC) and earn an amount of $50/- through premium. By doing so, I am deliberately speculating that share price of ABC shall not move beyond $850/- ($800 + Premium of $50) till the expiration of the contract. In this strategy, I shall start incurring losses once ABC stock start moving from the level of $850/- and it can be theoretically unlimited. Hence, there is a huge potential of making a loss through upside risk and limited potential of making a profit.

Let’s consider another example:

Suppose an investor sells a naked call option of XYZ stock for a strike price of $500/- at a premium of $10/- (since it is a short naked call option, he obviously doesn’t hold the shares of XYZ) with a maturity of one month.

Suppose, after one month, the share price of XYZ moves to $800/- on expiry date. Since the option is in the money leading the same to be exercised by the buyer, the investor has to buy the shares of XYZ from the market at a price of $800/- and sell it to the buyer at $500/-. Here, the investor makes a loss of $300/-. Had the share price of XYZ been moved to $400/-, it would have earned the premium as in this scenario options expires out of the money and will not be exercised by the buyer. The pay-offs are summarized below.

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