Stock Market Trading
Selling Call Options
By selling a call option, you are selling the right to buy the underlying stock or index at a particular strike price to an option holder. Sellers have obligations. Selling a call option prompts the deposit of a credit. You get to keep this credit if the option expires worthless. A trader who sell call options believe that the market will fall.
To make money on a short call, the price of the security must stay below the call's strike price. The profit is limited to the credit received from the sale of the call.
If the price of the security rises above the short call strike price, it will be assigned to an option holder who may choose to exercise it. Other words the option seller must buy the underlying stock or index at the current price and sell it at the call's lower strike price (current price - strike price = loss). The maximum loss is unlimited to the upside, which is why selling "uncovered" or unprotected call options comes with such a high risk.
Covered and not Covered Call:
If you owned a stock you can sell the call and receive the premium. This is called writing a covered call. If the stock declines in price you keep the premium. If the stock goes up in price the options buyer exercise the option and demands that you deliver the stock at the strike price. In this case you loose your stock but you keep the premium.
If you did not own the underlying stock you still might sell a call. If the stock goes down you keep the premium. However, if the stock goes up and the call buyer exercises the option you have to buy a stock to deliver it to the call buyer. This this the most aggressive and risky strategy an investor can use.