Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Selling an Out of the Money Call

Example:                 XYZ stock is trading at $86 

Outlook:                  You are neutral to bearish on XYZ stock.

Possible strategy:    Sell Out of the Money Call                                                           

                             Sell one XYZ November 90 strike call @ $2.40

 
 

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock Price

Sell 90 Call
Profit/(Loss)

75

$2.40

80

$2.40

85

$2.40

92.40

$0

95

($2.60)

100

($7.60)

 

 

At Expiration:

  • Maximum Profit = Premium received for sale of call.
  • Maximum Profit = $2.40
  • Breakeven = Short Call strike price + Premium received
  • Breakeven = 90 + 2.40 = 92.40
  • Maximum Loss = Unlimited

In Summary: Selling an out of the money Call option is a neutral to bearish strategy with the intention of collecting option premium.  Selling naked options may require special approval from your broker.