How To Sell a Call Option on Robinhood?
Buying, holding, and selling shares of a company's stock is never as easy as forex traders make it seem. There are some steps to be taken to ensure some things get to the right places. This is more special when it comes to options trading. Whether it's a call option or a put option, certain steps must be taken regarding underlying security. In this article, we'll be discussing what a call option is, how to sell a call option and other important stuff like how to sell your call options on Robinhood. Let's get into it.
What Is A Call Option?
A call option is when you have the right but not the obligation to purchase an underlying stock. A call option is one of the two types of options trades in the forex market. The other type is known as a put option but that's not our focus today. A call option entails a lot of things. These things include the strike price, which is the amount paid to buy the said stock, the premium fee, which is the amount paid per share, and the time value of such a product. Investing in options is always seen as a smart move from the side of the investors because they are allowed to invest a little part of their money into a contract that could exponentially max out their gains. This is seen to be safer than the typical risk and returns investing as it involves hedging away from positional risk. You might be wondering how call options work. Well, it's simple, their prices are generally derived from the underlying security. This is however affected by other factors (volatility, time, and intrinsic value), all these things are items that would be used to calculate the exact value of the option. This would enable the calculation of the premium and the strike price of such an option.
For example, if an investor buys a call option of XC at a strike price of $200 and an expiration date of January 1. This means the investor reserves the right to purchase 100 shares (standard options price) of XC's stock anytime before the expiration date, which in this case is January 1st. If the value of the stock declines as the option moves closer to its expiry date, the value of the option itself would also become lower. It's important to know that the buyer of the option in this case also has the right to sell the shares to another options trader at any time before the expiration date. Such options are always sold at the prevailing market price. There are times when there would be a little variance as to how options are sold. For example, when a call option is said to be covered, it means whoever is selling it owns the underlying security and also can sell it to another person (you know, you can't sell what you don't have). Selling them may lead to additional profit. Look at it this way, if A buys the right to purchase to sell XCs stock at a certain price before the expiration date and he sells the right to B. Since B pays beforehand, it doesn't matter if the value of the stock falls below the trend line, A would still have his full income because he might sell the options to B at a lower price than B paid for it.
How To Buy And Sell A Call Option In RobinHood
Now that we've given you a brief background on what call options are, it's only normal we tell you how to buy and sell them on the forex market. RobinHood, due to its easy interface and great customer service, among its other features, would be our case sample. Let's get right into it
Buying A Call Option
One way to not put your eggs in the same basket on Robinhood is to buy calls. However, you have to make sure you've done extensive research on these calls before you decide to invest in them. Also, make sure you set a budget for it. Setting a budget before investment helps manage losses. Now, if you have a budget in mind for your purchase, you should buy a call option in that price range.
1. You have to find stocks that you believe would rise on the trend line. If you're in it for the short term, you should be looking for stocks with features like earning reports or drug trial reports. This is regarded as a bullish outlook. For long-term traders, on the other hand, you only need to worry about the sales.
2. You have to make sure liquidity is present. How to do this is to buy a call option with a low spread. A spread is a difference between the ask price and the bid price of a stock. This is the money that goes to the broker itself. It's the highest money a buyer could pay and the lowest money a seller could receive. Options contracts with low spread are generally seen as less risky due to the market liquidity
3. You should choose a strike price and an expiration date. That's right, the only thing you have to guess in this case is not only the direction of the trend. You also have to make your decisions around the strike price and the expiry date of the product.
4. Make sure you know exactly how many call options you would like to buy. You can now go ahead and determine how much to hold this position. The market allows you to control a larger position but this means you're going to buy a bunch of shares in hundreds.
Selling A Call Option
Selling a call option on the other hand requires a few steps. There's no need for any kind of decision-making. You planning to sell means you've already made your decision and it's probably a good one.
What's next are the necessary steps you need to take to sell your call option
1. Open the Robinhood app and input your login details
2. Search for the stock you'd like to sell the call option. To do this, you can tap the search icon on the top right corner of the homepage
3. Once you've searched and found the stock, a new page would appear, showing more details about the stock. Features such as its spot price would be displayed on this part of the page.
4. In the right corner at the bottom of this page, tap on "trade"
5. After that, Tap on trade options, then select call options.
When's The Best Time To Sell A Call Option
Determining the best time to sell a call option can be tricky, but there's a basic approach to it. Selling a call option can amass profits if you're betting on the fact that the stock price would stay at the same point or even go lower or a little higher. You're hoping the stock price does not rise above the strike price. This is because your profits are more in the premium than the stock itself.
The downside to this is that once you sell the call option, you give up the right and potential to make gains if the stock price rises exponentially. It would be to your disadvantage.
Another time you can sell a call option is when you're sure that the stock price would continue to fall. In this case, the premium price you collect would slightly minimize your loss even though it doesn't completely eradicate them. Selling a call option doesn't protect you from losing money.
Call Options vs Put Options
Unlike a call option, a put option's value increases as the stock price falls. Even though they have similar risk and reward features, they act in totally different aspects. These differences are further explained below.
1. Losses under put options are capped. (You can't lose money below $0). This however does not mean you can't lose the whole premium fee and even more than that when the stock goes sideways (and we don't mean on the trend line). This is unlike a call option where sometimes, losses are unlimited.
2. Selling a put option gets the seller a premium. The catch in this case however is that the seller gets to bear all the risk if the stock doesn't go as predicted.
3. If you buy a put option and as time goes on, the put expires worthless, as a buyer, you could lose all your money.
4. On the other hand, just like buying a call option, purchasing a put option allows you to earn back many times your initial capital.
There you have it, all you need to know about put options and call options. We hope these tips come in handy as you choose the next trade to start or close. Trade safe and have a lovely day. Till we meet next time.