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 Writing calls
Issued on August 07 2010 par Strategies-options.com
Writing a call is a strategy extremely used by asset managers and funds.
Writing options is a very widespread style of asset management throughout the world. In the case of calls, one needs to divide the types of strategies into at least two distinct groups.
I - Naked calls Sellers want a profit due to premium. The purpose of this strategy is to make money for a stable to a down move forecast on an underlying , e.g the value of the premium will decrease for three reasons: a - time decay will lower the option value each day (see theta) whatever the movement of the underlying would be b - if an asset drops by 1% for example, a call will lose a total value of delta*1%. The seller of that option would be able to buy it bacl for less that he sold it before c - if an asset remains stable, volatility will generally drop, and once The seller of that option would be able to buy it bacl for less that he sold it before. Pay Attention however if the underlying suddenly goes up, writing calls exposes to losses in theory unlimited in this case! Graphically it comes:   II – Covered calls Managers own securities in portfolio. In order to increase their incomes, they are able to forecast a level on a particular asset where they would sell it by wtritting a call, that way cashing a premium. Two cases 1 - the underlying soars at least until the strike, that allows managers to sell the underlying keeping the premium This is an extra bonus. 2 - the asset does not go up or even drops. The manager keeps his shares and the premium, that makes him to increase incomes from stock Graphically it comes   Something short put alike, isn’t it ? Next : The Call Spread: A First Attempt Previous : Writing Puts Download the pricer here BASIC OPTIONS STRATEGIES - INDEX BASIC OPTIONS STRATEGIES - CHAPTER I BASIC OPTIONS STRATEGIES - CHAPTER II BASIC OPTIONS STRATEGIES - CHAPTER III BASIC OPTIONS STRATEGIES - CHAPTER IV Strategies-options.com |
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