Ready to dive into the exciting world of options trading? Selling call options can be a powerful strategy to generate income and potentially profit from stock movements, but it's crucial to understand the ins and outs before you begin. And if you're an ETRADE user, you're in the right place! This comprehensive guide will walk you through every step of selling a call option on the ETRADE platform, from understanding the basics to placing your trade and managing it afterward.
Let's get started, shall we?
How to Sell a Call Option on E*TRADE: Your Ultimate Step-by-Step Guide
Selling call options, often referred to as "writing calls," is a strategy where you sell someone the right, but not the obligation, to buy 100 shares of an underlying stock from you at a specific price (the "strike price") on or before a specific date (the "expiration date"). In return for selling this right, you receive an immediate payment called a "premium."
This strategy can be used for various reasons, such as generating income on existing stock holdings (covered calls) or speculating on a stock's price decline (naked calls). Regardless of your motivation, understanding the mechanics is paramount.
Step 1: Understand the Basics and Your Strategy
Before you even think about logging into E*TRADE, let's make sure we're on the same page about the fundamentals. This is where you engage with the core concepts and define your approach.
What Exactly is a Call Option?
Imagine you own 100 shares of a company, let's call it "Tech Innovators Inc." (ticker: TII). You believe TII's stock price, currently $100, might stay flat or even go down a bit in the next month. You could sell a call option with a strike price of $105 and an expiration date one month out.
Underlying Asset: The stock, in this case, TII.
Strike Price: The price at which the buyer can purchase the stock from you, e.g., $105.
Expiration Date: The date by which the option must be exercised, e.g., one month from now.
Premium: The money you receive for selling the option, e.g., $2.00 per share (or $200 total for one contract, as each contract represents 100 shares).
Covered Calls vs. Naked Calls: Know Your Risk!
This is a critical distinction that directly impacts your risk profile.
Covered Call: This is where you already own at least 100 shares of the underlying stock for each call option contract you sell. If the stock price rises above the strike price and the option is exercised, you simply sell your existing shares at the strike price. Your risk is limited to the potential loss of upside profit on your shares. This is generally considered a conservative strategy for income generation.
Example: You own 200 shares of TII. You sell two TII $105 call options. If TII goes to $110, your shares are "called away" at $105, and you keep the premium. Your maximum loss on the option is limited to the difference between your cost basis and the strike price, minus the premium received.
Naked Call (Uncovered Call): This is where you do not own the underlying shares when you sell the call option. If the stock price rises significantly above the strike price, you will be obligated to buy the shares at the market price to fulfill your obligation, potentially incurring unlimited losses. This is an extremely risky strategy and is generally only suitable for experienced traders with a high-risk tolerance.
Example: You do not own TII shares. You sell one TII $105 call option. If TII unexpectedly skyrockets to $150, you'll have to buy 100 shares at $150 to deliver them at $105, resulting in a $45 per share loss, plus commissions, minus the premium received.
Choose your strategy carefully and understand the maximum potential loss before proceeding. For beginners, covered calls are almost always the recommended starting point due to their significantly lower risk.
Step 2: Ensure Your E*TRADE Account is Options-Approved
Before you can trade options, your E*TRADE account needs to be approved for options trading, and specifically for the level of options trading you intend to do. Selling covered calls typically requires a lower approval level than selling naked calls.
How to Check Your Approval Level:
Log in to your E*TRADE account.
Navigate to "Accounts" or "Customer Service."
Look for sections related to "Account Settings," "Profile," or "Trading Permissions."
You should see your current options trading level. If it's not sufficient for selling calls (specifically covered calls or uncovered calls, depending on your strategy), you'll need to apply for an upgrade.
Applying for Options Trading:
If you need to upgrade your options approval level:
You'll typically find an option to "Apply for Options Trading" or "Change Trading Permissions."
You will be asked a series of questions about your financial situation, investment experience, and risk tolerance. Be honest and accurate in your responses. E*TRADE uses this information to assess your suitability for options trading and assign you an appropriate options trading level.
The approval process can take a few business days. You'll be notified via email once your application is reviewed.
Step 3: Research and Select Your Underlying Stock
This is where the analytical work comes in. Choosing the right stock is crucial for a successful call option strategy, especially for covered calls.
Key Considerations for Stock Selection:
Liquidity: Choose stocks with high trading volume and a liquid options market. This ensures you can easily enter and exit your trades without significant price impact. Look for stocks in the S&P 500 or other major indices.
Volatility: While some volatility can be good for generating higher premiums, excessive volatility can lead to your covered calls being exercised unexpectedly or naked calls incurring massive losses. For covered calls, look for stocks you are comfortable owning long-term.
Fundamental Analysis (for Covered Calls): Since you're essentially committing to sell your shares at the strike price if the option is exercised, make sure you're comfortable holding the stock in the long run if it doesn't get called away. Consider the company's financials, industry trends, and future prospects.
Technical Analysis: Look at the stock's chart to identify support and resistance levels. For covered calls, you might consider selling calls slightly above a resistance level, believing the stock might not reach that level.
Step 4: Access the E*TRADE Options Chain
Once you've chosen your stock, it's time to navigate to the options chain on E*TRADE.
Log in to your E*TRADE account.
In the search bar or under the "Trade" menu, enter the ticker symbol of the stock you've chosen (e.g., TII).
You'll be taken to the stock's quote page. Look for a tab or section labeled "Options," "Option Chain," or "Trade Options." Click on it.
This will display the options chain, which is a table showing various call and put options available for that particular stock.
Step 5: Configure Your Options Chain View
The options chain can look a bit overwhelming at first, but E*TRADE provides tools to customize your view.
Key Elements to Look For:
Expiration Dates: At the top of the options chain, you'll see a list of available expiration dates (e.g., "July 19, 2024," "August 16, 2024"). Click on the expiration date that aligns with your strategy's timeframe.
Calls and Puts: The options chain will typically be divided into two sections: "Calls" on the left and "Puts" on the right. You'll be focusing on the Calls section.
Strike Prices: These are listed down the center of the chain.
Bid and Ask Prices:
Bid: The highest price a buyer is willing to pay for the option.
Ask: The lowest price a seller is willing to accept for the option.
When selling (opening a "sell to open" order), you'll generally aim for the Bid price or slightly above.
Last Price: The price at which the option last traded.
Volume: The number of contracts traded today. Higher volume indicates more liquidity.
Open Interest: The total number of outstanding contracts that have not yet been closed or exercised. Higher open interest also indicates good liquidity.
Implied Volatility (IV): A measure of the market's expectation of future price swings. Higher IV generally means higher premiums.
Adjusting Your View:
E*TRADE often allows you to filter the options chain by:
Displaying more or fewer strike prices.
Filtering by "In-the-Money," "At-the-Money," or "Out-of-the-Money" options. For selling calls, you'll often look at Out-of-the-Money (OTM) calls, as these have a lower chance of being exercised, but also generate lower premiums. At-the-Money (ATM) and In-the-Money (ITM) calls will yield higher premiums but have a higher probability of being exercised.
Step 6: Select Your Call Option (Strike Price & Expiration)
This is where you make the specific selection for your trade.
Choose an Expiration Date: Select a date that fits your market outlook and strategy. Shorter-term options (e.g., 30-45 days out) generally decay faster, which can be advantageous for sellers (time decay or "theta" works in your favor). Longer-term options offer more premium but also more time for the stock to move against you.
Select a Strike Price:
For Covered Calls:
Out-of-the-Money (OTM): If you want to keep your shares and collect premium, choose a strike price above the current stock price. The further out-of-the-money, the lower the premium but also the lower the chance of your shares being called away.
At-the-Money (ATM): If you are willing to sell your shares at the current price and maximize premium, choose a strike price near the current stock price.
In-the-Money (ITM): Selling ITM calls means you are practically guaranteeing your shares will be called away if they remain ITM at expiration. You'll receive a higher premium, but the intrinsic value (difference between strike and current price) will be greater than the time value. This is often used for a "buy-write" strategy where you buy the stock and sell the ITM call simultaneously.
For Naked Calls: This is extremely risky. You would typically choose an OTM strike, hoping the stock never reaches that level. However, even a small move against you can lead to significant losses.
Identify the Bid Price: Once you've chosen your expiration and strike, look at the "Bid" price for that specific call option. This is the price you're aiming to receive when selling the option.
Step 7: Initiate the Trade Ticket
Now that you've identified your desired option, it's time to create the trade order.
On the options chain, for the specific call option you want to sell, click on the "Bid" price (or sometimes a "Sell" button next to it).
This action will typically open a trade ticket or an order entry form.
Step 8: Configure the Order Details
The trade ticket is where you specify the exact parameters of your sell order.
Action: Ensure this is set to "Sell to Open" (not "Sell to Close"). "Sell to Open" means you are initiating a new short options position.
Quantity: Enter the number of contracts you wish to sell. Remember, one option contract represents 100 shares of the underlying stock. So, if you want to sell calls on 200 shares, you'd enter "2."
Order Type:
Limit Order (Recommended): This is crucial. A limit order allows you to specify the exact price (the premium) you are willing to receive for selling the option. Always use a limit order when selling options to ensure you get your desired premium. You can set the limit price slightly above the current bid if you want to try for a better fill, but be prepared for it to take longer or not fill at all if your price is too aggressive.
Market Order (Avoid for Options!): A market order executes immediately at the best available price. While fast, this can lead to "slippage," meaning you might receive a significantly lower premium than you expected, especially for less liquid options. Do not use market orders for opening options positions.
Limit Price: Enter the premium you want to receive per share. This should be close to the current Bid price. For example, if the Bid is $2.00, you might try $2.05, or simply $2.00.
Time in Force:
Day (DAY): The order is active only for the current trading day. If it doesn't execute by market close, it's canceled.
Good 'til Canceled (GTC): The order remains active until it is filled or you manually cancel it (typically up to 60 days). Use GTC if you're not in a rush to fill and are willing to wait for your desired price.
Important Note on Covered Calls:
If you are placing a covered call order, E*TRADE will typically recognize that you own the underlying shares and will designate the trade as a covered call. Double-check that the order entry system correctly identifies it as a covered call if that is your intent. If it doesn't, or if you're concerned, ensure you have sufficient shares in your account before placing the order to avoid an accidental naked call.
Step 9: Review and Confirm Your Order
This is your final chance to catch any errors before sending your order to the market.
Carefully review all the details:
Action: Sell to Open
Underlying Symbol: (Correct stock ticker)
Option Contract: (Correct strike, expiration, and call type)
Quantity: (Correct number of contracts)
Order Type: Limit
Limit Price: (Correct premium you expect to receive)
Time in Force: (Day or GTC)
Estimated Premium Received: E*TRADE will usually show you the total premium you expect to receive (Quantity x Limit Price x 100).
Commissions: Review any estimated commissions or fees.
Confirm funds/shares: Ensure you have the necessary shares in your account for a covered call, or sufficient margin for a naked call (though again, avoid naked calls if you're not an expert).
Click "Preview Order" or "Review Order."
Read the final confirmation screen, which will often include disclaimers and risk disclosures.
If everything looks correct, click "Place Order" or "Send Order."
Step 10: Monitor and Manage Your Position
Once your order is filled (meaning someone bought your call option), the premium will be credited to your account. Your work isn't over, though! Effective management is key.
How to Monitor:
Portfolio/Positions Tab: Your open options position will appear in your E*TRADE portfolio. You'll see the option symbol, quantity, current market value (which will fluctuate), and your profit/loss.
Real-time Quotes: Keep an eye on the underlying stock's price and the option's price.
What Can Happen to Your Sold Call Option?
Expiration Worthless: This is the ideal scenario for a call seller! If the stock price remains below your strike price at expiration, the option will expire worthless. You keep the entire premium you received, and your obligation ends. For covered calls, you retain your shares.
Buy to Close: You can "buy to close" your position at any time before expiration. This means you buy back the same option contract you sold.
Why do this? If the stock price has dropped, or if time decay has significantly reduced the option's value, you can buy it back for less than you sold it for, thereby locking in a profit and removing your obligation. This is a common risk management strategy.
Assignment (Exercised): If the stock price rises above your strike price at expiration (or sometimes before expiration if it's significantly in-the-money), the option buyer may "exercise" their right to buy the shares from you.
For Covered Calls: Your shares will be automatically sold at the strike price. You keep the premium and realize the profit from selling your shares at the strike price (which might be higher than your cost basis).
For Naked Calls: This is the nightmare scenario. You will be obligated to buy 100 shares at the current market price (which is higher than your strike price) and then sell them at the strike price, incurring a potentially unlimited loss. This is why naked calls are so dangerous.
Managing Your Covered Call:
If the stock moves higher but stays below the strike: Great! You're making money from time decay. You can let it expire worthless or buy to close for a smaller profit.
If the stock approaches or goes above the strike:
Let it be assigned: If you're comfortable selling your shares at the strike price and are happy with the profit, simply let the option be assigned.
Roll the option: If you want to keep your shares but the option is threatening to go in-the-money, you can "roll" the option. This involves:
Buying to close your current call option.
Simultaneously selling a new call option with a later expiration date and/or a higher strike price.
This often involves paying a debit (cost) but gives you more time or a higher strike price to potentially avoid assignment.
Buy to close and keep shares: If you believe the stock is going to rally significantly, you can buy back the call option to remove your obligation and participate in the full upside of your shares. This will incur a loss on the option, but potentially save you from missing out on larger stock gains.
10 Related FAQ Questions
How to find highly liquid call options on E*TRADE?
You can find highly liquid call options by looking for options with high "Volume" and "Open Interest" in the E*TRADE options chain. Generally, options on large-cap, actively traded stocks will have better liquidity.
How to calculate the potential profit from selling a covered call on E*TRADE?
The maximum profit from a covered call is the premium received plus the difference between the strike price and your original purchase price of the stock (if the stock is called away), minus commissions. If the option expires worthless, your profit is simply the premium received minus commissions.
How to close a sold call option on E*TRADE?
To close a sold call option, you would place a "Buy to Close" order for the same option contract you originally sold. Navigate to your "Positions" tab, click on the option, and select "Close Position" or "Trade Option" to initiate the order.
How to roll a covered call on E*TRADE?
Rolling a covered call typically involves a "buy to close" order for your current option and a "sell to open" order for a new option with a later expiration and/or higher strike price. You can often do this as a single "roll" or "spread" order type on E*TRADE to execute both legs simultaneously.
How to avoid assignment when selling a covered call on E*TRADE?
You can avoid assignment by buying back the call option (buying to close) before expiration, especially if the stock price is at or above your strike price. Alternatively, you can roll the option to a later expiration date or a higher strike price.
How to set a stop-loss for a sold call option on E*TRADE?
While you can't directly set a stop-loss in the same way as a stock for a sold option, you can set a "buy to close" limit order at a higher price than you sold it for. This acts as a manual stop-loss, limiting your potential loss if the option price increases (meaning the stock moves against you).
How to check the margin requirements for selling naked calls on E*TRADE?
ETRADE's platform will typically show you the estimated margin impact when you are placing a naked call order. You can also find detailed margin requirements in ETRADE's margin handbook or by contacting their customer service for specific scenarios.
How to understand options Greeks when selling calls on E*TRADE?
E*TRADE's options chain or analysis tools may display "Greeks" like Delta, Gamma, Theta, and Vega. For sellers, Theta (time decay) is generally favorable as it erodes the option's value over time. Understanding Delta helps estimate how much the option's price changes with the underlying stock, and Vega helps understand sensitivity to volatility.
How to identify in-the-money vs. out-of-the-money calls on E*TRADE?
On the E*TRADE options chain, for call options, any strike price below the current stock price is "in-the-money" (ITM). Any strike price above the current stock price is "out-of-the-money" (OTM). Strikes exactly at or very close to the current stock price are "at-the-money" (ATM).
How to deal with early assignment of a call option on E*TRADE?
Early assignment is relatively rare for calls unless there's an upcoming dividend payment and the option is deep in-the-money. If your covered call is assigned early, your shares will be sold from your account at the strike price, and you will be notified. For naked calls, you will be debited for the cost of buying the shares at market to deliver them at the strike. In either case, E*TRADE will notify you of the assignment.