Call: Seller's Perspective

The Opportunity
The seller knows that the property is worth $100,000. She has been trying to sell this property for a while when presented with the proposition to sell a call to the buyer. She has heard of the announcement, but has lived through these planning sessions before. Her research suggests that the value of the property will remain the same, or increase very little, especially in the short term. Once she sells this option to the buyer, she would make a 10% return on her money in a three month period of time, regardless of the outcome!!!

Risk
The seller has limited risk in this endeavor. If the transaction goes through, she would sell her property for the current price. The risk is that she would not be able to enjoy the significant rise in the value of the property if the rumor is true.

Selling the Call
For the seller, the call option represents a method to enhancement their investments. By selling calls, the landowner can have an additional means of income, and still have ownership of the land. The seller would receive an additional $10,000, and not have to do anything. Also, remember that the seller receives this money immediately. She could spend this money any way she deems fit, including buying another acre of land.

The Win
If the rumor is false, the land remains relatively the same in value. The seller, of course, received the $10,000 three months ago. She has earned an additional 10% on her property, and can use the money to enhance her investments.

An Added Bonus #1
Let’s imagine the rumor was true, but was announced after the option expired. The seller waits, and the property skyrockets to $500,000. The seller then sells, and pockets the $400,000 profit on the property, plus the $10,000 she received from the option.

An Added Bonus #2
Let’s imagine the planning commission hasn’t made the decision within the three months. They promise to revisit the idea within a few weeks. The seller could then sell the option again for an additional $10,000!!!

An Added Bonus #3
Let’s imagine the price of the land doesn’t skyrocket, but rises gradually. After the initial option expired worthless, the seller sells a new option, but with a new strike price of $125,000. She does this because she knows she’d receive an additional $10,000 for the property, plus a $25,000 on the appreciation of her land. That’s a 35% profit, not counting the initial 10% profit!!! If she is good, she could repeat this cycle all the way to $500,000, and pocket several premiums on the way!!!

The Injury
If the rumor is true, the value of the land will increase significantly. The seller’s phone is ringing off the hook with people wishing to buy the property for $500,000. However, she must reject those offers, and sell the profit for $100,000. If she hadn’t sold the option, she could have sold the property for a huge profit.