What happens when someone exercises a call option you sold?

When you exercise a call option, you would buy the underlying shares at the specified strike price before expiration. You would exercise your rights and buy the shares only if the call option is in the money, meaning the strike price is less than the stock price.

How does a call option payout?

A call option writer stands to make a profit if the underlying stock stays below the strike price. After writing a put option, the trader profits if the price stays above the strike price. An option writer’s profitability is limited to the premium they receive for writing the option (which is the option buyer’s cost).

How does strike price work?

A strike price is a set price at which a derivative contract can be bought or sold when it is exercised. For call options, the strike price is where the security can be bought by the option holder; for put options, the strike price is the price at which the security can be sold.

What is the difference between strike price and exercise price?

An option’s exercise price is the price the underlying security can be either bought or sold for. Investors also refer to the exercise price as the strike price. The difference between the exercise price and the underlying security’s price determines if an option is “in the money” or “out of the money.”

How do selling calls work?

Selling Calls The purchaser of a call option pays a premium to the writer for the right to buy the underlying at an agreed upon price in the event that the price of the asset is above the strike price. In this case, the option seller would get to keep the premium if the price closed below the strike price.

Is selling a covered call a short position?

Selling a covered call or a put option is technically a form of shorting, but it is a very different investment strategy than actually selling a stock short.

What happens if an option is not exercised at strike price?

If the price of the underlying security does not increase beyond the strike price prior to expiration, then it will not be profitable for the option buyer to exercise the option, and the option will expire worthless, “out of the money”. The buyer will suffer a loss equal to the price paid for the call option.

Do you have to own the shares to exercise a call option?

It is not necessary to own the shares to profit from a price increase, and you lose nothing by continuing to hold the call option. If you decide you want to own the shares (instead of the call option) and exercise, you effectively sell your option at zero and buy the stock at $90 per share.

Should you exercise your call options when the market is falling?

Particularly this is the case when there is still time value left in the call option and the share price has risen faster than time-decay has eroded its value. With the market tumbling, you can choose not to exercise your option but instead sell it to capture whatever premium remains.

How do Option sellers make money?

Option sellers earn the income from the premiums and are obligated to fulfill the sold contracts. Because all options expire, the call option buyer hopes the stock will move above the strike price before the expiration date, and the seller would like the share price to stay below the strike price.