June 25, by m slabinski. American options can be exercised at any time before they expire. To get back to even, or get back to whole, you need to cover the amount you are obligated to pay the amount you are short. To cover that obligation, you either need to buy back the option or have it expire worthless.
The difference between options and rent is that the option price can change making it cheaper to cover the obligation in the future. A call is out of the money OTM if its strike price is above the current stock price. All options that expire out of the money expire worthless. Out of the money options expire worthless because they do not have intrinsic value. If a call is OTM, you are able to buy stock cheaper on the market than you can with the option.
A call is at the money ATM if its strike price is the same as, or close to, the current stock price. A call is in the money ITM if its strike price is below the current stock price. In the money options are exercised at expiration for their intrinsic value. An in the money call lets the owner buy stock for less than its current market value.
There are multiple ways the price of a call can decrease. At tastytrade and dough, we sell options in underlyings with high implied volatility rank IVR. We measure current implied volatility against historical implied volatility to get a relative understanding of where implied volatility is now.
If you look on the dough trade page, you will see an implied volatility rank from with 0 being low and being high. When we sell a call option, we look for an underlying with an IVR over Higher implied volatility increases the premium we collect for the option.
Looking at IVR gives us context around historical implied volatility, so we know if the implied volatility is high compared to where it has been previously. Instead, navigate to the grid page on dough to filter underlyings by IVR for the best strategic opportunities. Theta decay, or time decay , is the amount an option position loses in time value each day. When selling a call, your theta value will be positive.
A positive theta value means the option will lose value as time passes, making the option cheaper for you to buy back.
As time passes, people pay less for options with shorter durations. Selling a call by itself is a bearish directional play. If you sell a call you hope the underlying will go down bearish , making the call you sold less valuable. The trade will be profitable as long as the underlying stays below the strike price plus the credit received from the option.
Short call options have undefined risk. Undefined risk means that your max loss is unknown at order entry.
There is no limit to how high a stock can go, making it impossible to know the max loss at order entry. However, we can use the dough platform to calculate theoretical probabilities of a stock reaching different levels. The main thing you need to understand about undefined risk trades is how margin requirement is calculated and appropriate position sizing.
Margin requirement, or buying power reduction, is not a static number and may increase if the position moves against you. When choosing an underlying for an undefined risk trade, it is important to choose one that is appropriate for your account size.
The one position would make up too much of your total account, if you even have the margin to initiate the trade. Instead, you can look at smaller underlyings or defined risk trades. If you navigate to the trade page, you can drag a call option from the top left corner of the screen to select a strike price and expiration. Once entered, you can pick either of the two above methods for selling a call. Once the call is on the screen, you will choose an expiration cycle and strike price. Selling a call is the same as shorting a call.
A short call has undefined risk. A short call is a bearish directional strategy. Theta decay is beneficial when selling options, as it reduces the option's price. Still have questions about short calls? Email us at support dough. This week, Robyn is trading the SPY in a multi-month calendar put spread. See why and learn her reasoning behind her options trade!
Robyn places a reverse jade lizard in EBAY for this week's segment, to take advantage of heightened earnings volatility in the underlying. Selling a short call is a bearish undefined risk trade. Not totally sure what that means? Learn more here and see how to sell a call using the dough platform!
Beginner intermediate Blog Sign Up Login. When do you Sell a Call? Implied Volatility At tastytrade and dough, we sell options in underlyings with high implied volatility rank IVR. Theta Decay Theta decay, or time decay , is the amount an option position loses in time value each day. Selling a Call in dough There are two different ways to sell a call in dough. Mar 29, intermediate robyn trade of the week , ETF , put spread , days to expiration , bearish Robyn Comment.
Robyn Ready to Trade Live. Jul 15, intermediate Robyn Mendel , program , robyn trade of the week , jade lizard , bearish Mike Butler Comment. Robyn's Trade Of The Week: Jun 25, intermediate education , calls , undefined risk , bearish m slabinski Comment.More...