So I have 100 shares of Mj and wanted to do a sell call on it.....do I choose sell open or sell close and why? I use E*TRADE and if it does hit the strike price will they automatically take the 100 shares i own if the person on the other end exercise’s their option, or do I have to transfer the shares?
New to options but have a few questions...please help
- Thread starter Thestuff7863
- Start date
It's "sell to open" and "sell to close". This are just reference terms (not used by all traders or brokers) to indicate whether you're opening a new position (initiating a new trade), or closing/exiting a previously opened position. So you'd chose to sell to open.
Your shares will be transferred automatically, disappearing from your account, when the option expires, or if the other party exercises their purchased option early (rare).
Your shares will be transferred automatically, disappearing from your account, when the option expires, or if the other party exercises their purchased option early (rare).
OP should be made aware of dividend risk on his shares. Worth knowing when opening a short.
I only lose the div if it hits the strike price correct?
ok thank you..when would I use “sell to close” and why?
If you'd want to take profit early or exit early with a loss. You can trade options and don't need to wait till expiration. Selling a call "on the shares or against the shares" is only in your mind and only you know that you'd like to wait till expiration. Other people may be trading them daily or holding for a few days, or exiting at some profit level or loss level, or closing one call and selling another, etc.
You'd lose dividend when not owning the stock that pays dividends. But since you own the shares then this shouldn't apply to you, though if the other party wants your dividend then they can exercise their call early to get your shares. This is also rare but may be a more frequent reason for early exercise. Though not sure whether @gaussian had other types of risk in mind.
so if MJ drops .50 cents tomorrow I can “sell to close” ??? And their wouldn’t be any penalty? Also would I keep the premium paid by the other party?
Yes, you can buy and sell at any time (I hate the term “sell to close” but yes). You wouldn’t keep any premium except price difference of that option between today or tomorrow or between any time you’d buy it vs sell it. Options can be traded like stocks, and you can even look at an option price chart and trade off of it instead of stocks. So if you didn’t know it’s an option you’d just buy it and sell it just like stocks. The “premium” is a part of the option’s price that changes together with the stock price as the time goes by. If someone pays “$5” premium that makes the option more expensive then next day that premium may be worth $4.50 and be built into the price of the option.
No penalties for trading options.
I know you don't like to hear this.
From one newbie to another: Before you place any trades, buy a book on options, perhaps, one of the Dummy Books, or go visit the CBOE educational site and read up on the nuances of options. If you really want to learn, buy John Hull's book or Larry McMillan's book and study them carefully.
Most of the time, everything is priced in, i.e., don't believe folks who said selling covered calls are a low risk way to generate regular income. Think about this: your counter party has a wife and two kids, and has to make payment on his Ferrari. Why would he hand you his money?
You can succeed and thrive but you have to find a true niche and selling covered calls is not an edge.
Good luck.
From one newbie to another: Before you place any trades, buy a book on options, perhaps, one of the Dummy Books, or go visit the CBOE educational site and read up on the nuances of options. If you really want to learn, buy John Hull's book or Larry McMillan's book and study them carefully.
Most of the time, everything is priced in, i.e., don't believe folks who said selling covered calls are a low risk way to generate regular income. Think about this: your counter party has a wife and two kids, and has to make payment on his Ferrari. Why would he hand you his money?
You can succeed and thrive but you have to find a true niche and selling covered calls is not an edge.
Good luck.
I doubt most covered callers know about dividend risk