How to Sell Call Options to Protect a Portfolio
Once considered risky investments, options contracts have gone mainstream as more and more investors use them to protect their stock portfolios from significant losses while making a little extra money. A covered call option offers someone else the right to buy shares of your stock at a particular "strike" price for a set period of time. This means that if the price of the stock goes up and the buyer exercises the option, you are obligated to sell your stock for the given price. Investors write covered calls when they believe that the stock price is headed up, but not past the strike price, or if they believe the stock will jump a bit, then fall.
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Instructions
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Select which shares you want to use for the call option. You must have at least 100 shares, as options contracts are sold in 100-share denominations. You also want to find a stock that you believe is going to stay the same price or go up. Make sure it's something you're willing to sell if the option is exercised.
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Contact your money manager or online brokerage firm to find out what calls are available to sell. Options contracts are standardized, so you'll have a list of strike prices and expiration dates to choose from.
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Select a strike price and expiration and work with your broker to "write," or sell, the option. You'll receive the greatest premium for prices that are more likely -- closer to the actual stock price -- but you also have the greatest risk of option assignment, or being forced to sell your stocks.
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Collect the premium on the option. This is the price the buyer pays to hold the option contract.
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Offset the option to close the position. If the option goes "in the money," meaning that the stock price is higher than the call strike price, you may decide you don't want to sell your shares. If the option is not assigned, you can buy a put -- the right to buy shares -- for the same strike and expiration date, and the two contracts cancel each other out. Since the put is cheaper than the call, you'll keep difference in premiums as profit.
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Sell your shares. If the call holder exercises the option, you must sell your shares. Your call premium is added to sale proceeds as profit for tax purposes.
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Keep the premium. If the call expires without exercise, keep the premium as profit.
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Tips & Warnings
Put options may also provide insurance when you believe that a stock price will fall. Puts give you the right to sell your shares at a given price, and may be more effective at preventing a major loss than call options. Talk to your money manager for specific advice in your situation.
Don't write a call option on any stock you aren't willing to sell. Remember that you are legally obligated to sell shares if the option is exercised.
