An investor often chooses to sell the call option when he encounters that a particular asset might fall within a certain period of time. During such a case, the purchaser of the call options needs to pay a premium to buy the asset at a price which has been agreed upon on the condition that it is higher than the present day price. If the price happens to be low, then the seller would get the premium. Apart from this, investors might even want to sell the options if they wish to use them into using them for other strategies involved in the options trading. These strategies might vary from the covered call, iron condor, bull put spread, iron butterfly, or bull call spread depending upon the circumstances in the stock market.
Here are three scenarios that you might encounter while selling the call option.
Scenario A: When the proposed stock is above the present day price on the date of expiry.
In cases where the price of the proposed stock is higher than the present day price before the date of expiry, then the stock will need to be “called away”. This is the investment terminology would mean that you are given an exercise notice and would are obligated from selling the given stock at the same present day price. Moreover, if you happen to sell the covered call, then you would also be required to sell off your stock. However, these can be regained within a month’s time.
One of the disadvantages that you encounter during this selling process is that the investor often gets the limited gain. Thus, for those who are aiming for larger gains, selling off the covered call is preferably not a good strategy and should be avoided. However, the benefit that you get is that you get to keep the premium call option, when the stock gains more than the present day price. An expert trick while dealing with such a scenario is that you can choose a proposed stock that you have kept for a long-term and it is not expected to be volatile till the date of its expiry.
Scenario B: When the proposed stock is below the present day price as per the date of expiry.
If you happen to find that the proposed stock price is below the present day price, then the option would expire without being used, and you would be able to keep the stock and the premium all by yourself. Moreover, you would also be able to sell the covered call for the later month. The benefit of selling the stock during such a situation is that the premium will automatically get reduced and will not be eliminated. However, the risk associated with this is that you might lose money when the stock price falls.
Scenario C: When the proposed stock is near the present day price as per the date of expiry.
This is one of the favourable scenarios that one can encounter for a covered call. If the stock price happens to be slightly below the present day price, then you might get to keep the premium and stock in your hands. Moreover, you can even sell the covered call and make some extra income on the same. However, if the stock rises above the present day price, then the option would be called away. The major benefit of that you get in this case is that you can get hold of the stock and premium at the same take and can sell calls on the same stock continuously. The only risk that is associated with this scenario is that if the stock fall, it would cost you money otherwise your option would be exercised.