The seller of options wins 95% of the time, writes Peter Hodson. Read more.
Selling a covered call gives you a premium and gives another investor the “option” to buy your stock at a fixed defined price, at a fixed expiry date in the future. For example, an option seller might get $2 to sell a $50 September call option on XYZ when XYZ shares are trading at $45. If XYZ goes above $50 before the expiry date , then the seller is obligated to sell their stock at $50. If XYZ fails to hit $50, he keeps his stock. Either way, the option seller keeps the $2 premium .
Why then, does the options market continue to exist? Well, there is of course a legitimate hedging need for options. But the main reason is … greed. When an options buyer is right, the leverage is miraculous. One can buy a short-term $0.50 option, at times, and see it go to $10, once in a while. Quick fortunes can be made if the market moves quickly and sharply. But, that is not the norm.
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Options are a great way to lose money, unless you're the one selling themThe seller of options wins 95% of the time, writes Peter Hodson. Read more.
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