Hey there! If you‘re looking to generate some income from options trading, selling calls on Robinhood can be a great way to go. As an experienced trader myself, I know first-hand how lucrative call selling can be when done properly.
In this comprehensive guide, I‘ll walk you through everything you need to know to sell call options on Robinhood successfully. Whether you‘re a total beginner or seasoned pro, you‘ll learn key call selling strategies, helpful tips to boost your premiums, and step-by-step instructions for placing your first trades.
Let‘s dive right in!
What Are Call Options Exactly?
Before jumping into the how-to steps, it‘s crucial to understand what call options are.
A call option gives the buyer the right, but not the obligation, to purchase 100 shares of the underlying stock at the stated strike price prior to the option expiration date.
As the call seller, you are obligated to sell your shares of the underlying stock to the buyer at the agreed strike price if the call option gets exercised by the buyer.
Let‘s look at a quick example to better understand how call options work:
- You own 100 shares of XYZ stock currently trading at $50 per share
- You sell a call option on XYZ with a strike price of $55 that expires in 1 month
- If XYZ stock price rises above $55 before expiration, the buyer will likely exercise the call option
- You are then forced to sell your 100 XYZ shares to them for $55 per share
- You pocket the premium as profit and miss out on any gains above $55
The key takeaway is that by selling a call option, you‘re agreeing to sell your shares for the strike price if the stock rises above that level before expiration. The premium you collect when selling the call is yours to keep either way.
Now let‘s go over why you might want to sell calls in the first place.
Top Reasons to Sell Call Options
Selling call options can be a great strategic move depending on your investing goals. Here are some of the top benefits and motivations for selling calls:
Earn income from premiums – The premium is the upfront payment you receive from the buyer for selling the call option. It‘s an easy way to collect income.
Generate yield on idle shares – If you own shares of a stock you want to keep long-term, you can sell calls to earn extra yield.
Lower your cost basis – The premium lowers your effective cost basis in the stock. This reduces your break-even price.
Hedge against a decline – The premium cushions against a drop in the underlying stock‘s price. Defined-risk trading.
Get paid for your outlook – If you‘re neutral to bearish on a stock, call selling lets you collect income from your market outlook.
Profit from overvalued stocks – Highly valued stocks have expensive options. You can collect larger premiums.
Now let‘s go over the key risks and downsides…
Be Aware of These Call Selling Risks
While call selling has its perks, there are some definite risks and downsides to consider:
Uncapped downside on naked calls – Huge risk if the stock rockets higher and you don‘t own the shares.
Opportunity cost – By selling calls, you limit your chance to profit from the stock rising past the strike price.
Early assignment – While rare, the call buyer could exercise before expiration which forces early stock sale.
Tax implications – Premium income gets taxed at short-term capital gains rates which are higher than long-term stock gains.
Required collateral – For covered calls, you need 100 shares of stock for each call contract sold. Buying power is needed.
The risks can be managed by using appropriate trading strategies, which brings me to…
Call Selling Strategies to Know
Utilizing the right call selling strategy for your outlook and goals is crucial for success. Here are some of the most common call selling approaches:
This involves selling calls on stocks you already own. It allows you to earn income on your long stock positions. Upside is limited to the strike price but downside protection comes from the premium collected.
Here you are selling calls without actually owning the underlying shares. This is considered risky but has profit potential if the stock stays below the strike price. Can result in unlimited losses.
Bear Call Spreads
This uses two calls to cap upside risk. You sell a call and buy a higher strike call to hedge. Maximum profit is the net premium received from the spread. Less risky than naked calls.
Poor Man‘s Covered Call
Don‘t own the stock? You can mimic covered calls using long-term LEAP call options as collateral instead of actual shares. Offers similar upside/downside dynamics as true covered calls.
Understanding these key strategies gives you flexibility to tailor your call selling to any market environment or outlook. Now let‘s move on to…
5 Tips for Maximizing Your Call Premiums
The premium you collect when selling calls is a major factor in your overall profitability. Here are 5 tips to help you maximize the premiums earned:
Sell calls on volatile stocks – Stocks with higher volatility command larger premiums as there‘s more uncertainty priced into the options.
Go farther out of the money – Strike prices further out of the money are less likely to get exercised so you can collect more premium.
Sell calls on expensive stocks – The options on stocks with high P/E ratios and valuations tend to have juicier premiums.
Choose closer to expiration – All else being equal, shorter dated calls have higher extrinsic value and premium.
Time call sales around earnings – Option premiums expand heading into earnings. Sell calls right before the announcement.
Now that you know the strategies and premium boosting tips, let‘s walk through exactly how to place a call sell order on Robinhood‘s trading platform…
Step-by-Step Guide to Selling Calls on Robinhood
Robinhood makes it super easy to sell calls right from your mobile app. Here is a step-by-step walkthrough:
1. Analyze the stock and choose your strike
Pull up the stock chart and research page on Robinhood. Pick a strike price above the current trading price (for covered calls).
2. Tap "Trade" and select "Trade Options"
This brings up the options chain. Make sure the tab shows Calls and the expiration date you want.
3. Choose the call contract to sell
Scroll down and tap on the call option with the strike price you selected in step 1.
4. Pick the order type
Select "Sell Call" from the order ticket. Then choose "Limit" or "Market" for the order type.
5. Input your order details
Enter the number of contracts you want to sell and the limit price (if applicable). One contract covers 100 shares.
6. Double check and submit the order
Give the order details one last look. Make sure all the info is correct, then swipe up to submit.
And that‘s it! In just a few taps, you can place an order to sell calls using the Robinhood app.
Once the order fills, you‘ll see the sold call option show up in your Robinhood account under the options holdings section.
Now it‘s just a waiting game to see if the calls expire worthless (profit) or get assigned at expiration (forced stock sale at strike price). Either way, the premium collected upfront is yours to keep!
Key Takeaways and Next Steps
Selling call options on Robinhood is straightforward but does carry some risk if not managed properly. Here are some key takeaways:
Weigh the benefits vs downsides and choose your strategy carefully. Covered calls reduce risk.
Maximize your call premiums by selling farther OTM strikes, closer expirations, and sticking with volatile, expensive stocks.
Use limit orders and start slowly. Only sell what you feel comfortable with. Protect yourself.
Monitor for early assignment. Roll closing positions out and up to avoid stock sale.
Use call selling to generate income from idle shares or profit from a neutral/bearish outlook.
Interested in selling your first call on Robinhood? I suggest paper trading a few times first and start with just 1 contract. As you get the hang of call selling, you can slowly increase your position size.
I hope this guide gives you the confidence to try selling calls with an understanding of both the profits and risks. Feel free to reach out with any other Robinhood options questions! Trade safe.