How to sell options
Recently started practicing how to sell options, initially kept losing money, but gradually gained some insights.
First, it's essential to understand the difference between buying and selling options:
Buying options: You pay to purchase options, gaining the right to buy or sell stocks at a specific price in the future. Controlling large stock positions with a small fee is essentially paying for leverage.
Selling options: Using your stocks or cash as collateral, you collect premiums from others, providing them the right to buy or sell stocks at a future date. Essentially, it's like selling insurance, specifically:
Selling Call options: You hold stocks and have already made a profit, unsure if they'll rise further. Most people would place a slightly higher sell order—sell if possible, accept if it's sold too early, and lose nothing if it doesn't sell. This scenario is ideal for selling Call options. If exercised, you secure profits; if not, you keep the premium. Based on your target price and intended selling time, sell the corresponding Call option. For example, if you hold 100 BABA shares with an 80% profit, current price at 190, and plan to sell at 200 next Friday, you can convert this order into selling a "Next Friday, 200 Call option" and collect the premium.
Profit if exercised: If the option price is $120, the post-exercise profit is: 120 + (200 - 190) * 100 = $1,120. If the stock price exceeds 200 upon exercise (i.e., sold too early), you accept the "missed gains" since you collected the premium.
Profit if not exercised: If the stock price remains 190 next Friday, no exercise occurs, and you keep the $120 premium.
Things to note:
1. Psychological pressure: After selling options, if the stock keeps rising and the option price increases, the system shows losses, creating immense stress. Avoid impulsively buying back at a high price to close the position. Like selling a house cheaply, no matter how much it appreciates later, you shouldn't buy it back. If you must, find a reasonable price to close.
2. Don't sell the underlying stock: After selling Call options, your shares are collateral. Selling them may leave you short at exercise, freezing funds to cover the shortfall. Insufficient cash triggers margin calls, which is troublesome. Besides, selling Calls implies you intended to sell eventually, so there's no need to sell now.
$Coreweave(CRWV.US)
$Alibaba(BABA.US)
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