When I "sell to open" an options contract, I have to own the stock?

Question

I don't understand. To sell to open a call contract is to take a short position, correct? So why is my online brokerage telling me I need to own the stock in order to sell a call to open?

Are all brokers like this?

Answer 1

The brokers catagorize their clients. You have been catagorized as not allowed to sell naked options. It is that simple. I had the same problem and quite frankly it made me very unhappy. If you have your heart set on that strategy, try Optionsxpress. They might be more understanding.

Answer 2

The risk is unlimited, as in shorting, but leverage in this strategy is even greater, so the broker has imposed limits on this type of trading.

Brokerages do make exceptions, generally for clients with plenty of experience and sufficient margin in their accounts.

There's a quality, a nuance, to your question that suggests you haven't quite understood the risk in an uncovered call sale. It's the riskiest of the four basic opening positions. The stock could go to the moon. The short naked call would be assigned. The stock would have to be bought, at whatever price. It is the brokerage which will be obligated to make good on the deal.

In setting up the naked call sale, the broker therefore requires 1) stock to cover this possibility, or 2) presence in account of another option that will cover, such as a different long call.

You could try another brokerage house to see if their requirements are less strict.

You could also do a calendar spread. Or a diagonal spread. Or buy puts, since parties only sell naked calls when they believe stk will go down. Your present broker will allow these.

Answer 3

Sounds like the brokerage is making you do a covered call. That covers you and them. If you did not own the stock and all of a sudden the stock price jumped and the contract was exercised, you could be stuck with owing a lot of money. If you can't make good on delivering the stock, then the brokerage company has to deliver the stock to whoever bought the option from you. This could cost you and the company a lot of money.

Most brokerage firms do not allow just anyone to write call options without having some sort of asset to back it up, either the stock themselves, or enough money or capital to cover problems as what I described.

You may want to check around and see if there are any brokers that are willing to let you write calls without owning the stock, but I would bet that alot of them have the same restrictions.

Answer 4

you probably dont have the right to sell uncovered calls. it is very high risk to sell uncovered calls. Unless you are experienced, the brokerage won't let you. Covered calls is when you have the stock to back up you selling a call. i don't have the right to sell uncovered calls either. why not buy a put?