Suppose you think the market is about high enough to sell short but you are not sure
just when and where the top will be reached. U.S. Steel is selling around 75 when you
make up your mind to sell it short. Then you give your broker an order to sell a Call on 100 U.S. Steel good 30 days. He sells the Call at 80 which means that if U.S. Steel is selling
above 80 at the end of 30 days, the man you sold the option to will call it or buy it from
you at 80 and you will be short at 80 with a credit of $112.50 which you received for the
You might be able to sell Calls twice, three, time, five times or more and take in the premium money before the stock is called. Suppose, after you have been called for Steel at 80 which puts you short at 80 – you decide to sell a Put. You get it at 75, which gives you 5 points profit, and you again receive $112.50 for the Put good 30 days. We will assume that at the end of 30 days Steel is selling at 74 and the man you sold the Put to, delivers 100 shares of Steel to the broker for your account. This means that you have bought 100 shares at 75 and covered your short position, making a profit of 5 points or $500.00. less
commission and taxes; and at the same time you have made $225.00 extra by selling the
Puts and Calls and have taken no additional risk.
How to protect yourself in delling puts or calls
Whether you want to enter the market or not, you can sell puts or Calls and can protect
yourself by buying or selling the stock before the Put or Call expires. For example:
Suppose you have sold a Call on U.S Steel at 80 and you are not long or have not
bought U S Steel. When it advances to 78 or 79 you decide that you do not want to sell it
short as the market looks very strong. In order to protect yourself you buy 100 shares of
U.S. Steel at 79. Then, we will assume that at the end of 30 days it closes at 87; the man
you sold the Call to demands delivery of the stock and you deliver or sell it to him at 80.
You have one point Profit, because you bought it at 79, and you have $112.00 premium
money that you received for the Call.
Suppose you sell a Put on U.S. Steel at 72, good 30 days. Then the market turns weak
and is declining fast. When it reaches 74, you decide that it acts ,as if it is going very much
lower, and in order to protect yourself you sell 100 shares of U.S. Steel short at 74. Then,
we will assume that the stock declines and closes at 69, and that man you sold the Put to at
72, delivers you the stock and 72, which put you out of the market and still gives you a
profit of 2 points and the premium money of $112.50.
When you are long of the market or have stocks bought, it is nearly always to your
advantage to sell Calls good 30 days until your stock is called, because if you are wrong
and the market goes against you, will be taking in the Premium money you receive for the
Calls, which will help to cover the loss on the stock.
When you are short of a stock, in most cases it will pay you to sell a Put good for 30
days and take in the money, because if the market declines – as it often does – and fails to
reach the Put price, you will still have the money you received for the Put and will still be
short of the stock and can sell a Put for next 30 days and take in another $112.50.
I know many traders, when they are long of the market or have stocks bought, who sell
Calls every 30 days and sometimes carry the stack for six or twelve months before the man who buys the Calls has an opportunity to call the stock. During all that time they are
making more than one point a month profit by selling a Call every 30 days.