Thank you for the info. I was referring to a covered call. Sorry, I should have been more explicit. In the case of the covered call does the buyer of the covered call option buy 100 shares from me at the contract price?
I'm trying to figure out what the pros/cons are of selling covered calls because so many people here swear by it.
I am a fan of this particular
Free Beginner Options Trading Course | Option Alpha source of options education, but this is by no means the only one. This video series continues with 2 more video series, all of them covering a variety of options concepts. I consider these to be a reasonably comprehensive introduction to options concepts, and these should be considered the minimum entry level knowledge to do more.
They will be covering the covered call - it is frequently the entry point for many into options trading.
I remember this taking me about 10 hours for each of the 3 video series - maybe more like 8 - to get through them all.
The question about pros and cons is a good one to be asking. There is no such thing as free money or risk free return. If there were such a thing, you can be confident that there are better funded and better equipped market participants that would have bought up all of that free money and risk free return. If you can't figure out at least some of the risks, or you find yourself thinking that this is free money, then it isn't - keep looking. And asking questions (as you have)!
The risks / rewards that I focus on when looking at a single covered call trade:
- On the reward side, you collect a premium of some size up front. This is your money to buy sushi with, invest in something else, or whatever you want to do.
- On the risk side, the big risk is that the shares go up. And while they are at it, they go up enough that you miss out on a lot of that gain. As a made up example - you sell an 800 strike call (which does mean that you'll be selling 100 of your shares at $800 per share if/when you get assigned) and the shares are trading at $900 at expiration. You earned that up front premium - let's pretend it was $5 just to make something up - but you've also just missed out on $100 worth of share gain. The net is a 'loss' of $95 relative to doing nothing.
- Back to the reward side - if the shares finish below that $800 strike then you would collect that $5 premium and then owe nothing further when the option expires.
That's just basic mechanics though. The 3 video series mentioned above cover what I think of as (1) option basics, (2) getting into a trade, and (3) getting out of a trade. There are a lot more moving parts with options than buy and hold share ownership.
We all make our own decisions and experience our own consequences - I hope you've already got that minimal level of options knowledge, or that you go through the videos (or some other resource) to gain that minimal level of knowledge if you don't already have it.
