Hey Trader,

One “income generating” strategy that has been getting a lot of attention lately – especially as Wall Street Bets enthusiasts have spilled into the trading world – is selling calls.

On its surface, it seems simple enough … right?

As with most things options-related … it’s not always as easy as it seems on the surface.

First of all, let’s clear one thing up …

Selling calls is risky. Selling covered calls helps control that risk somewhat, but there is still a lot of risk involved.

When you sell a call, you are selling someone the right (but not the obligation) to buy a stock from you at a specific price on or before the expiration date.

Why would you do this?

You sell call options to collect the premium paid by the buyer.

So if a buyer is willing to pay $1 per option, and you sell them that option, they’ll pay you $100 per contract (ignoring the fees, etc. that would normally have to be factored in).

Then if their contract expires worthless, you get to pocket that premium!

Now, this can be a great option for active traders – especially those who are looking to sell a stock at a certain price.

For example, let’s say you bought Apple (Ticker: AAPL) at $140, and you’re hoping to sell the shares once it nears its all-time highs at $180.

While you wait for that to happen, selling covered calls allows you to generate income on shares that would otherwise more or less just be sitting there.

And since you were planning on selling at $180 anyway, if AAPL suddenly rockets above $180, then even if your shares are called away, you still sold them for more or less the price you were originally looking for.

But let’s say … Elon Musk threatens (er, offers?) to buy AAPL and the shares suddenly shoot to $200 …

Well, you aren’t able to fully capitalize on that upside, because you sold contracts that obligate you to sell your shares at $180!

Selling covered calls does limit your profit potential when it comes to share price gains.

Another scenario? Maybe you don’t want to sell your AAPL shares.

Maybe you want to hold onto them …

Selling covered calls is a nice way to generate income, but you do run the risk of losing your shares should they suddenly shoot higher.

On the flip side, say AAPL suddenly starts cratering.

If you want to dump your AAPL shares to limit your losses, you will likely need to buy-to-close your sold contracts, which adds costs on top of your share price losses.

Although, when you are taking stock of your losses, selling covered calls does actually help lower the breakeven price of buying your shares.

For example, if you bought AAPL at $140, and it suddenly drops to $130, normally you’d be footing a $10 loss.

But if you were able to sell covered calls for $1, now your per share losses are only $9.

Another issue to be aware of is that if you are holding a stock with large unrealized gains, and it is called away via your sold call options, you are still on the hook for the tax liabilities. You’ll want to factor that into your trading strategy should you decide to give call selling a try.

Now, you’ll notice many of these “complications” have to do with the underlying shares …

So what if you just sold calls without owning the underlying?

That … might be a really terrible idea.

Selling uncovered calls (aka naked calls) theoretically opens you up to infinite losses, the same way buying a call opens you up to infinite profits. 

If you sell a naked call, and the stock blows up … well, you could be on the hook for quite a bit of cash.

Covered calls, on the other hand, means you already own the shares of stock that you are selling calls on.

So if you sell calls and the stock blows up, you have the shares on hand to cover your debts, if needed.

Obviously, having your shares called away isn’t what you are going for, but it sure beats being on the hook for something you don’t have!

Selling covered calls is a legitimate income generating activity, but as with most things having to do with options, it’s not always as simple as it may appear on the surface.

Make sure you take ALL of the factors above into account before you put your hard-earned money on the line!

Your Only Option,

Mark Sebastian