How to Effectively Buy and Sell Call Options for Profit?

Other than hedging your open positions, buying and selling call options can be profitable to the option writer and buyers. Trading options can be profitable in volatile markets regardless of their direction. And that’s because they trade options in anticipation of the market depreciating/appreciating.

Remember, as long as the price of the financial asset is moving; there is a strategy that can work to your advantage. Therefore, it’s crucial that you know which strategy to use. You should also know how you can limit your risk while maximizing your potential profit when buying and selling call options.

In our call options and put options explained article, we’ll compare call options vs put options and answer the question, “I bought a call option how do I sell it?” and we’ll also include the call option and put option example.

Understanding the Basics of Call Options and Put Options

Options trading might seem overwhelming, but if understood, you can profit from buying and selling call options.

First and foremost, an option grants you the right, but not the obligation, to sell/buy an asset before the expiry date. The put option grants you the right to sell an asset, while the call option does the opposite.

What Is a Sell Call Option?

Selling a call option means granting the buyer the right to buy an asset before a given date and a set price. A call option sell comes in 2 forms, naked and covered. Covered call options involve selling stocks that are held in your portfolio.

On the other hand, a naked call option has the same risk profile as short-selling stocks. The maximum profit of selling call options is the premium, but with a covered call, the shares can be called away.

What Is Buy Call Option?

Before we learn how to buy call option, we must know the meaning of buying call options. Purchasing a call or going long is an exceptional options strategy with relatively low risk. After all, your loss will be limited to the premium paid, while profit is potentially limitless.

So what does it mean to buy a call option, and why buy a call option? When trading call options, particularly buying long-term call options, you’re risking the premium.

Therefore, a call option with a strike call of 100 and a premium of $2.5 can become profitable when its price exceeds $102.50. According to our call option strike price example, the price has to increase for you to earn more.

Buying a Put Option vs Selling a Put Option

Purchasing a put option is the best alternative to shorting an underlying asset. It can create a perfect means of hedging a downside portfolio. On the other hand, when writing an option, you only risk buying an asset. But if it goes against the buyer, then you get to keep the premium.

Exploring Trading Strategies for Call Options in the Stock Market

As aforementioned, every market has a unique winning strategy; therefore, it’s crucial that you pick the right one. So instead of settling for any strategy, in our call option explained simply, we’ll show you some of the best strategies:

  • Iron condor: This strategy includes a short put vertical spread and short call vertical spread. The short put spread is a bullish option while a short call is bearish, which offset each other. On the other hand, the expiration date is the same, while spread width and strike prices vary.
  • Broken wing butterfly: This is a slightly directional or neutral strategy. This strategy features credit and debit spreads, with the short strikes being similar. For this strategy, the credit spread must be wider than debit.
  • Diagonal spread: With this strategy, you purchase a long-term put or call at OTM/ITM/ATM and write a short-term put/call further lower. The cost of the trade shouldn’t exceed 80% of the spread’s width, and you can profit if the price goes in our favor.

The Concept of Premium in Call Options Explained

Premium is the market price of an option. It’s the price you pay for a call option contract. The option’s premium is made up of the extrinsic and intrinsic value of ITM options and the time value for OTM contracts.

In fact, the premium can be higher when the market has greater implied volatility or more time to expire. So when you buy a call option, you pay a premium of a call option.

Buying Call Options as a Beginner Investor

Generally, buying long term call options can be beneficial to traders making direct market bets. If you think the asset’s price will increase, you can purchase call options with a lower premium than the stock.

So how do I buy a call option? When investing in call options for beginners, you need to pay a premium for a call option. And if it goes against you, then you’ll lose your premium.

But can you buy a call option without owning the stock? Well, the answer is simple, you don’t need to own the shares to sell or purchase a call. If you believe that its price will increase, you can purchase a call option instead of the stocks.

Step-By-Step Guide on Selling Your Call Option

How do you sell a call option? Well, selling a call option is the opposite of buying a call option. To sell a call option, you should do the following:

Step 1: Open a Trading Account

Before selling call options, you must prove that you know what you’re doing. Remember, call options trading requires huge capital, so before being allowed to open an account, the broker should know more about you.

Step 2: Pick the Call Option to Sell

Using a scanner, you can determine the stocks whose price will remain stable and then pick the right ones. So how do you hedge a call option? Basically, it’s like buying car insurance, hoping that it won’t crash.

After all, anything can happen on the road, so it’s always a good idea to be protected at all costs.

Step 3: Predict the Strike Price

When selling an option, the trader can profit when it closes while out of money. This means below the strike price or flat. If it expires while out of money, you won’t have to deliver the shares and get to keep the premium.

Step 4: Determine the Timeframe

Every contract must have an expiration period which is the day it can be exercised. Unfortunately, you can’t just pick any date; instead, you’ll have to pick from the available options.

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