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Track 'n Trade Futures End of Day Options

Selling a Call

Video Transcript

In this Track 'n Trade Pro Options trading training video, I want to talk to you about how to sell a Call option.

Of course, you can buy a Call option, and you can sell a Call option. You can buy a Put option, or you can sell a Put option. Again, in this example, I want to talk to you about how to sell a Call option.

The reason you would sell a Call option, is because you get to collect the premium of the option that you sell. So if you sell it for $500.00 premium, that's what somebody else would buy it for, they pay $500.00 for it, then you would sell them the $500.00 call option, you would get to the $500.00 into your account. You get the $500.00.

Remember: when you buy an option, your risk is limited. It's limited to the $500.00 you paid for it, or whatever premium you pay for it. But your profit potential is unlimited, it's unlimited to the extent that the market will move in your favor.

When you sell a Call option, or when you sell an option, your risk is unlimited, and your profit potential is limited to the amount of money you collect on the premium. So if you sell an option for $500.00, the maximum amount of money you can make is $500.00, but your risk is unlimited to the extent of the movement of the market.

We're going to go through, and we're going to simulate selling a Call option. The way we do that, is we simply press our Call button, we come in and we decide at what point we want to sell, we drag it up and down, as we drag our call option up and down, it hops between the different strike prices. You can see this is a 99.50 Call option. This is a 99.25 Call option, its value is $850.00. Here's a 99.00 Call option at $1,275.00. That's a little bit closer to the money.

Of course, the closer to the money that we get, the more expensive the Call option. The more money we collect- if we are the writer of the Call option, or the one who is selling it.

Let's do this, let's simulate selling this 99.25 Call option at a current value of $850.00. Release our mouse button, and this comes up and we come over to dialogue box, and we say we want to Sell (1) 99.25 Call option. The value is $850.00. We hit Okay. The next day, we step the market forward, and our option is filled.

Notice over here that our open option profit and loss is a negative number. That's the value of the current option. The closed profit and loss is $850.00. That's how much we sold the option for, so that's put into our account as a positive number. Now, we have an asset that is $725.00, negative, and $850.00 positive. Therefore, if we were to liquidate our option today, we would have a $105.00 profit.

If we wanted to collect the entire premium that we sold it for $850.00, we need to wait until the option expires. If it expires what we call- expiring worthless, or the market did not approach or exceed the strike price of 99.25, we will get to keep the entire amount of $850.00. Let's go ahead and simulate this market. As we step the market forward, we notice that the value of the option increases and decreases.

Right now, we can see that it's at a value of $675.00. That gives us a $150.00 profit, if we were to liquidate today. As the market continues to move and the market moves against us or in our favor, one way or the other, our profits and losses increase and decrease. We can track that over here in our accounting system. You'll notice as that market continues to approach our strike price, our open profit is decreasing, that's $55.00 in open profit. The value of that option is increasing $775.00.

As the value of that option increases, it decreases our profit. As that market continues to move forward, we either increase or decrease based on the underlying futures market and its movements. Now we have a big drop in our favor, which is away from our strike price. As that market drops away from us, you'll see that the value of that option will decrease, which increases our profit potential.

As we move this market forward and I'm going to move it relatively quickly here, you'll notice that the further and further away it gets from our strike price, that the value of the option increases or decreases at this point. This option has already decreased all the way down to a value of nothing. At this point the option is not worth anything, there's no money coming into that option. At this point you can look over here in the options open profit and loss is 0, the close profit and loss is $850.00, that's the money that we get to keep because we sold the option.

You could either go in and liquidate your option at this point, and take your profits, or what usually happens is you'll wait until the option expires. But if you get a situation where the option goes all the way to 0, it's probably in your best interest to go ahead and liquidate at that point, rather than to try and wait for it to expire.

At this point, you can see now it came back- I'm going to back up a couple of days, you can see that it came back in value, so as the underlying futures contract started to prices increase and approach the Call option strike, it started to increase in value again, which would of course, decrease our holdings.

If we wait for this market to come all the way to expiration, which is that purple line on the screen. That option will drop all the way down to having no value, of course when that happens, we have an option that has expired worthless and that's what we wanted. We wanted the option to expire worthless, and in so doing, we get to keep the entire premium that we sold it for; the $850.00.


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