Module 6: Selling Covered & Uncovered Options (Advanced Strategies)

Question 1

Question: What is a Covered Call Strategy?

Answer 1

Answer: A covered call is an options strategy where an investor sells a call option while owning the underlying stock, generating income but capping potential gains.

Question 2

Question: When should traders use a Covered Call?

Answer 2

Answer: Covered calls are used when a trader expects the stock price to remain neutral or slightly increase, allowing them to earn premium income while holding the stock.

Question 3

Question: What is an Uncovered (Naked) Call?

Answer 3

Answer: An uncovered or naked call is when a trader sells a call option without owning the underlying stock, exposing them to unlimited risk if the stock price rises significantly.

Question 4

Question: What is a Cash-Secured Put?

Answer 4

Answer: A cash-secured put is when a trader sells a put option while holding enough cash to buy the stock if assigned, earning a premium while waiting to buy at a lower price.

Question 5

Question: What is a Naked Put?Answer: A naked put is when a trader sells a put option without holding the necessary cash to buy the stock if assigned, exposing them to significant risk if the stock price drops.

Answer 5

Answer: A naked put is when a trader sells a put option without holding the necessary cash to buy the stock if assigned, exposing them to significant risk if the stock price drops.

Question 6

Question: What is the main risk of selling uncovered (naked) options?

Answer 6

Answer: The main risk is unlimited loss potential for naked calls if the stock price rises significantly and large potential losses for naked puts if the stock price falls.

Question 7

Question: How do traders select Strike Prices when selling options?

Answer 7

Answer: Traders select strike prices based on risk tolerance, stock volatility, and expected movement, often choosing out-of-the-money (OTM) options to maximize premium income.

Question 8

Question: What is an Option Assignment?

Answer 8

Answer: Option assignment occurs when the option seller must fulfill their obligation, either delivering stock (for calls) or buying stock (for puts), if the option is exercised.

Question 9

Question: What is Rolling an Option?

Answer 9

Answer: Rolling an option means closing an existing position and opening a new one at a different strike price or expiration to adjust the strategy.

Question 10

Question: What is the best market condition for selling options?

Answer 10

Answer: Selling options works best in low to moderate volatility markets, where premiums are attractive, and price movement is more predictable.

Question 11

Question: How do traders earn consistent income from options selling?

Answer 11

Answer: Traders earn income by consistently selling options with favorable risk-reward ratios, reinvesting premiums, and managing exposure.

Question 12

Question: What is a Credit Spread?

Answer 12

Answer: A credit spread is an options strategy where a trader sells one option and buys another at a different strike price, limiting risk while collecting a premium.

Question 13

Question: What is an Iron Condor?

Answer 13

Answer: An iron condor is a neutral options strategy that involves selling an OTM put and call while buying further OTM options to limit risk.

Question 14

Question: What are the tax implications of selling options?

Answer 14

Answer: Profits from selling options can be taxed as short-term capital gains if held for less than a year, while longer-held options may qualify for long-term capital gains rates.