December 13, by DayTrading. If you do not, and the option falls in-the-money ITM you will be on the hook for needing to sell shares of AAPL to the individual owning the call option at the given strike price. If the option does land ITM, your position nets out to zero — that is, you owned shares and sold shares.
Selling those options without covering them — by either owning the shares or having enough equity in the account to cover it if the option landed ITM — would potentially be a recipe for disaster. In fact, many brokers will not allow their clients to sell options naked unless they have it covered by a sufficient amount of collateral. Options buyers are giving up a relatively small amount relative to what they can earn.
As a seller one would need to pay whatever amount is stipulated depending on whether an option lands ITM and how far ITM i. If this the rate of return the option buyer receives is covered by owning the underlying asset, you are fine.
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If it is not, that can result in a massive loss. Many become confused over when they receive options premium when they sell these instruments. What you sell options, you form an asset and corresponding liability.
The asset is the premium derived from selling the option while the liability is the option itself, which can expire ITM. If the option expires out-of-the-money OTMit is worthless, which is the optimal outcome for the seller. As a result, the transaction would be settled and the premium is credited to you.
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If the option expires ITM, then it becomes more complicated. You receive the premium, but the effect of the liability will need to be calculated. If the option is fully covered — for example, you sell a call on AAPL and own shares of the underlying stock — and the option lands ITM, you forgo the extra profit you would have received by being long the stock only.
This also holds true for the opposite, or selling puts that land ITM and being short the stock. In other words, you earned the premium and nothing more. Accordingly, these types of covered strategies tend to work best when the stock remains around its current price.
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Also, the buyer of the option may exercise his right to buy or sell the underlying shares from you. It is then up to you whether to re-up the position in the security. Now if you had sold options naked i.
This, unfortunately, is how many traders wipe out their accounts. Accordingly, it is highly recommended to never sell options without owning the underlying or, at the very least, having the collateral available to do so. This is because the option eats up the profit in the underlying.
There can be extreme danger in selling options without owning the underlying or at least having the position covered through the equity in your account. It acts as a liability with unlimited downside. Top Brokers.
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