Can we sell Call options we don't own?

Question

I'm reading up on option strategies, and many requires the simultaneous act of selling and buying call/put options with different strikes or manturities. Buying the option is easy, but how can I sell the option if i dont already own it? And what do I do if still want to partake in the trade?

Answer 1

<< Buying the option is easy, but how can I sell the option if i dont already own it? >>

You can definitely sell a Call option (or Put or a Stock) which you dont own. Rules vary with each Brokerage company, but they need you to have a Margin account. The margin money is like a guarantee from you to the Brokerage (inturn to the exchange), that in case the Call option gets exercised (which will be the case when Underlying price goes above the Call's strike price), Brokerage will dip into your Margin money to cover the losses. The Margin money you have in your account decides the number of Calls (or Puts or Stocks) you can sell, without owning the Underlying.

<< And what do I do if still want to partake in the trade?>>

Almost all the brokerages have Margin Account facilities. But, you may need to apply for the Margin facility seperately after you have a regular trading account. Some Brokerages may allow you to place all trades that are part of a strategy to be placed in one go, after ensuring that your account has sufficient margin money required for the complete strategy (and some strategies dont need any Margin money, even though some of the legs in the strategy are short).

<< I'm reading up on option strategies, and many requires the simultaneous act of selling and buying call/put options with different strikes or manturities. >>

For a good analytics on Strategies, you can look at sites such as http://www.optionwin.com . For introductory details, you could look at http://biz.yahoo.com/opt/

Answer 2

<<<Can we sell Call options we don't own?>>>

Most brokerages have different option trading levels for different accounts. The trading level of your account determines what trades you are allowed to make.

<<<I'm reading up on option strategies, and many requires the simultaneous act of selling and buying call/put options with different strikes or manturities.>>>

I believe you are talking about spreads.

<<<Buying the option is easy, but how can I sell the option if i dont already own it?>>>

When you sell an option you do not own it is called "writing" an option. It means in return for premium you are paid when you sell it you are accepting the obligation to trade the underlying at the strike price if you are assigned.

<<<And what do I do if still want to partake in the trade?>>>

First find out what the different trading levels are at your brokerage and what is allowed at each level. Find which level allows you to make the trades you want and apply for authority to trade at that level. If approved you will be allowed to enter the trade.

The levels and what is allowed vary by brokerage.

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I also want to clear up some incorrect statements in other responses.

<<<When you "sell to open" a call option, you create a new option.>>>

That is only true if the person who is buying it is also opening a position. If he is covering an existing short position a new contract is not created; instead, the writer's obligation is simply transfered from the buyer to you.

<<<You can sell an option on a stock you don't own. It's called "Naked" calls or puts.>>>

Naked options are options that have no offsetting position. The offsetting position can be another option or the underlying. For example, in a bullish vertical call spread you buy a call with a lower strike price and write a call with a higher strike price. The call you write is not naked because it is offset by the long call position.

Also, if you write a put option it is not offset by owning the stock. It could, however, be offset by a short position in the stock.

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As an aside, if you want to trade spreads you should also learn about spread orders. You can, for example, use a spread order to say "buy a January call with a $50 strike price and sell a November call with a $55 strike price for a net price of $4.00." That way you can never be hurt by a sudden market move while you have an unhedged position.

Answer 3

You can sell an option on a  stock you don't own.  It's called "Naked" calls or puts.It is only done by either the extremely knowledgeable trader or the incredibly ignorant trader.......  This can only be done in a margin account.

You can make a lot of money doing this! But it only takes one bad trade to possibly wipe out your account (and more)............

See glossary & check out;

http://www.redoption.com/

Check out;

http://www.optionaddict.net/

http://www.optionplanet.com/

http://tryumph.wordpress.com/

https://www.cboe.com/

Answer 4

An option is a contract between you and another party.

When you "sell to open" a call option, you create a new option.

Answer 5

You can easily sell what you do not own, but that involves more risk. When dealing with options, your first buy or sell opens or starts the trade, then when you buy or sell the contract to close the position that is your second buy or sell.

Selling a call without owning the underlying stock is called going naked,  and your risk is hugh, selling a call while owning the underlying stock is called selling a covered call and your downside is very limited. Let's say you bought xyz at $20 per share. Then when xyz becomes $40 you sell a coverd call for a premium of $1 and a strike price of $42, that expires in Aug., this being July. If the stock jumps up to $100 and it gets called away from you at $42, you still made money, you bought it at 20 and got 1 premium per share, so it is like selling the stock at 43, you made 23 per share even thou if you owned the stock you could have gotten 100 per share for a profit of 80 per share! But lets say the stock never goes above 42, by the experiation date! You still own the stock, at 20 plus you made a 1 per share and the option expired worthless! You keep the premium and the stock.

Lets say it goes to 44 and you do not want the stock taken away from you, so you buy the call contract at 2 per share, you lose 1 per share but you keep the stock!

Selling a put means you give someone the right to put stock to you at a certan price within a certain time limit. The most you can lose is the strike price minus the premium if the stock goes to zero!!! As the stock starts to drop you can allways get out of the deal by buying the put contract therebye closing your position!

You get it?

You can also sell a stock without owning it, this is called going short.

Good luck,

Answer 6

Yes, you can sell the option if you don't own the underlying. But if the option is exercised, you will have to buy it at the current price to meet your obligation.

The practice of naked call writing is obviously for the experienced only. In fact many brokers won't allow you to do it.

Answer 7

Yes you can sell options you do not own.

There are 4 types of orders:

* Buying an option from  a zero starting position, a.k.a. going long the option  -> Open Buy

* Selling an option from a zero starting position, a.k.a. going short the option -> Open Sell

*Selling an option you have previously bought, a.k.a. going flat/closing out -> Closing Sell

* Buying back an option you have previously sold short, a.k.a. going flat/closing out -> Close Buy