Selling a call option is one of the easiest ways to make profits in the stock market. But with so many trading platforms, you’ll want to choose the one that not only protects your money but also allows for seamless transactions, such as selling a call option. That’s precisely what Robinhood offers.
In this article, we will show you how you can sell a call option on Robinhood and provide you with tips and tricks that will help you improve your trading skills and ultimately increase your returns.
What is a call option?
The basic idea of selling a call option is this: you sell someone else the right to buy a stock from you at a predetermined price (the strike price) on a predetermined date (the expiration). You will receive cash up front for this agreement, called a “premium.” If the stock price is less than the strike price on the expiration date, the buyer has no incentive to give up (exercise) the option and you get to keep the premium. On the other hand, if the stock price is greater than the strike price, the buyer exercises the option and you are obligated to sell the stock at the strike price.
Selling a call option is a great strategy if you believe the price of the underlying asset will rise.
How to sell a call option Robin Hood
It has never been easier to get started in the options trading market. Robinhood has put an easy-to-use interface into an otherwise complicated process. To sell a call option on a stock of your choice:
- Open the Robinhood app and enter your credentials to log in.
- Find the stocks you would like to sell a call option for. To do this, tap the magnifying glass in the top right corner of your home screen.
- Once you’ve chosen a stock, a new page will open providing more details about the stock, such as its spot price.
- In the lower right corner of the action details page, tap “Trade.”
- Tap “Trade Options” and then select “Buy Option.”
Factors to consider before selling a call option
Selling a call option can be a great way to generate some cash when the underlying stock price is trading below the strike price. However, it is important to make sure you have considered all of the following before making the final decision:
- Date of Expiry: The premium received by the seller of a call option increases as the time to expiration increases. The main argument is simple: as the time to expiration increases, the potential for the underlying stock to move into an in-the-money position increases. If that happens, the call will be assigned. So to compensate for the increased risk, the premium increases.
The expiration date is even more important if you own the underlying shares. If you sell a covered call option with a longer expiration period, you will increase the firm frame in which you will limit any gains that may materialize after a rally. - Premium: This is the payment you receive upfront for selling a call option. The premium depends on the difference between the spot price and the strike price. It will decrease as the strike price moves away from the spot price. But you are also less likely to be assigned a call with a lower premium.
- exercise price: This is the price at which you are obligated to sell the underlying stock if the call option is assigned. Call options with a higher strike price are less likely to be assigned and therefore generate a lower premium. Conversely, those with a lower strike price are more likely to move to an in-the-money position and therefore more likely to be assigned. All other things being equal, you should opt for a call option with a higher strike price because it gives you more room to profit from an increase in the price of the underlying stock.
- The number of contracts: Each options contract has 100 shares. You will receive a higher total premium if you sell a larger number of contracts. But to sell more contracts, you must own more shares of the underlying security..
How many types of call options can be sold?
You can sell a covered call or a naked call. To sell a covered call, you must own enough units of the underlying stock to cover the short position. For example, to enter into a call option contract to sell 100 shares of a stock, you must own at least 100 shares of that particular stock in your portfolio. To sell a naked call, you don’t need to have the underlying stock in your portfolio. However, the funds in your account must be sufficient to cover the short position if the call option is assigned.
When is the best time to sell a call option?
Selling a call option can be lucrative if you believe the price of the underlying stock will remain relatively stable or increase somewhat in the near future. You will be betting that the price of the underlying stock will not rise above the option’s strike price.
One of the benefits of selling a call option is that it gives you the opportunity to earn income on stocks already in your portfolio. You will receive a premium for each share pledged in the contract. But the strategy has a drawback: You give up the potential to profit if the stock price rises above the strike price because the call option will be assigned. Of course, you must remember that you will be obligated to sell the underlying shares to the buyer if the call option is assigned.
You can also sell a call option when you are pessimistic about a stock’s short-term prospects. If you sell a covered call and the price of the underlying falls, the premium received will slightly offset your losses. Selling a call does not protect you from losing money.
Trade options like a pro
Robinhood has many great features that make trading simple and easy. The app contains all the information you need, including the premium, expiration date, and strike price. If you are new to this type of trading, the information we have shared in this article should give you an advantage over other traders.
