April 14, 2006, Newsletter Issue #13: Distributing stock
Tip of the Week
Selling call options against a stock can also be implemented when one is looking to distribute the stock and raise a little extra cash in the process. Another way of looking at this is getting paid to place a limit order to sell the shares. Selling an in-the-money call option (the strike price is below the stock´s current price) increases the likelihood of the option being called away (i.e., the call buyer exercise his right to take delivery of the shares at the strike price). In this case, the seller receives more protection on a downside move and gives up all upside potential in the shares. On the other hand, selling an out-of-the-money call against a held stock decreases the likelihood of the stock being called away. Thus, there is less protection against an adverse move in the stock, but the seller is allowed to capture some of the upside in the shares between the time the option was sold and its expiration date.
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