How to Issue Stock Options

Sell stock options in both a down market and an up market.

Trading a stock option involves one party issuing or writing the option, and the other party buying the option. The issuer or writer of the option is effectively the seller of the option. A stock option is a contract that demands the seller give the buyer the right to buy (in a call option) or sell (in a put option) certain number of shares of the underlying stock at a predetermined price on, or before, a set future date. In exchange, the option seller collects a cash premium from the option buyer in the amount of the option's market price. Like trading stocks, investors issue, or sell, stock options through their brokers.

Instructions

1. Log into your online brokerage account, research stock price movement, and choose the type of option to issue. Stock options are a form of derivative, and their trading is based on information about the underlying stock. For example, if your research suggests a possible downward move in the stock price, issue a call option. If the stock price does go down later, the option buyer would not want to exercise the option to buy any shares, and the option seller keeps the option premium received for a profit.

2. Place the option trading order with your broker. For online trading, go to the broker's trading page, select the option and choose "sell to open" as the intended trading position, which means selling an option to open a new position. To issue the option, enter the option symbol, click on either "call" or "put" as the option type and specify strike price, or exercise price, at which the option seller is willing to sell or buy shares at the option buyer's request. Also decide on the number of option contracts and the option's expiration date, and instruct your broker your order type such as market order or limited order.

3. Enter an option sell order to close a position. Investors may also issue a stock option to close a previous option position in which he was the option buyer. Choose "sell to close" as the order position. When the investor has bought a call option earlier, and the stock price is above the strike price of the original call option, as an alternative to exercising the option, the investor could conveniently sell another call option at the current higher strike price to effectively cancel out the two positions for a profit. According to statistics cited by Investpedia, 60 percent of the option positions in the market are closed out with only 10 percent exercised and the balance expired unprofitable.

Tips & Warnings

• If stock research expects a potential upward move in the stock price, issue a put option. If the stock price does go up later, the put option buyer would not want to sell any shares and the option seller gets to keep the option premium collected for a profit.

• One stock option contract allows the trading of 100 shares of the underlying stock.

• You can decide on the option expiration date by checking from the list of standard, exchange-set expiration dates, which your broker displays on option research pages for every stock that is available for option trading.

• To know at what price to sell an option, especially when placing a limited order, refer to the bid and ask prices quoted by your broker.

• For the buyer of an earlier put option, issue/sell another put option to close the earlier position if the stock price is now below the initial strike price.

References

• Investopedia: When does one sell a put option, and when does one sell a call option?
• Investopedia: Option Basics: How Options Work