To The Moon

1. Building a Basic Understanding of Selling Call Options

For those unfamiliar with options, selling options may seem confusing. You might wonder, "How can I sell something I don’t own?" or "What’s the point of selling an option?" A real-life example involving a used car sale can help illustrate this.

Imagine you have a used car with a current market price of 20,000 RMB. You believe its price won’t increase significantly in the coming months. So, you decide to sell a call option.

• Buyer: Your friend, B, wants to buy your car but doesn’t have enough money right now. He hopes to buy it at 20,000 RMB within the next three months.

• Seller (You): You sell a call option, giving B the right to buy your car at 20,000 RMB within three months, in exchange for a 1,000 RMB premium.

Two scenarios may occur:

1. Price doesn’t rise or falls: If the market price stays at or below 20,000 RMB over three months, B won’t exercise the option since he can buy the car at the same or a lower price. You keep the car and the 1,000 RMB premium.

2. Price rises to 25,000 RMB: If the price rises, B will exercise his option to buy at 20,000 RMB. You still receive 21,000 RMB (car price plus premium) but lose out on a potential 5,000 RMB gain.

When it comes to stocks, you don’t need to own a “used car” to sell a call option; you only need enough funds to buy the asset if required.

Selling a call option means you collect a premium upfront as compensation for agreeing to sell the asset at a fixed price in the future. You can keep this premium, but if the price surges, you may miss out on potential profits.

2. DJT Call Option Example

Let’s use the recent DJT example. We simulated two trades selling DJT call options, and as of November 7, our first trade yielded a 91% profit, with four contracts earning $616.

First DJT Call Option Trade

When DJT’s price was $31.5, we sold a call option expiring on November 8 with a strike price of $70, earning a $169 premium. This deep out-of-the-money call option had a low likelihood of being exercised. Key points:

1. Maximum Profit: $169 (premium collected)

2. Maximum Loss: Potentially unlimited if DJT’s price rose sharply, though this was unlikely due to the high strike price.

3. Outcome Analysis: If DJT remains below $70, we keep the full premium of $169. If it exceeds $70, we sell at the strike price and take a -100 short position.

Second DJT Call Option Trade

In this second trade, when DJT was around $41, we sold a call option with a $12.5 strike, expiring on January 17, earning a $2,899 premium.

1. Maximum Profit: $2,899 (premium collected)

2. Maximum Loss: Potentially unlimited, given DJT’s current price of $41 is well above the strike price. If DJT rises further by expiration, losses increase.

3. Breakeven Point: $41.39 (strike price + premium per share).

3. When to Sell Call Options

Selling call options is often appropriate in the following scenarios:

1. Bearish or Neutral Market Outlook: Ideal if you believe the asset’s price will stay flat or decline.

2. Stable Holding Income: Useful for holders of the asset to collect additional income.

3. Hedging Strategy: Helps offset losses in a short position.

4. Premium Income Strategy: For investors focused on collecting stable premium income.

4. Common Questions About Selling Call Options

1. How do I close a sold option? Buy back the contract to offset your position.

2. How does profit fluctuate? Profit changes with time decay and price movements.

3. How is the breakeven calculated? Breakeven = Strike Price + Premium.

4. Difference between expiration and early close? Expiring options lose time value, while early closing sacrifices some time value.

5. What happens at expiration? If the price is at or below the strike, the option expires worthless; if above, you must sell at the strike price, even if it means buying at a higher price.