Selling Calls

Oh, no-- now we have to sell options? If you've understood the mechanics of buying options, you're already halfway there in comprehending the selling of options. All that's left is to reverse your role as from a buyer to a seller. 

Just as stated before, the key elements to options transactions remain constant: the strike price, expiration, and option's premium. By selling a call option, the seller sells the right to the buyer to purchase the unit of stock from him/her at the set strike price, when the market value of the stock is greater than the strike price at or before expiration. The seller sells the option price with the assumption that the stock's price will move down or stay the same. In this case, the seller will profit from the premium he/she has collected. 

The probability of success with options is determined by the movement of the stock. For buying calls, if the stock's price...

• Increases above strike price+ option premium= Where the stock price is above the strike price, in the given expiration period, the buyer may decide to buy the units of stock from the seller at the the strike price's value. The seller could be selling the units of stock for the current price (higher than that of the strike's) but is obligated to sell the units of stock for the lower, strike price. This is where his/her loss stems from. The seller's cost basis, however, is slightly reduced as his or her loss from selling the units of stock is offset from the profit gained from collecting the option's premium.
• Stays the same= You profit! 
• Decreases below strike price= You profit! 

In summary, a buyer of a call option is profitable in 2/3 cases, causing them to have a 1/3 chance of losing, as the stock price could increase. For selling calls, the max profit is tapped at the premium collected from selling the option.