A Long Call involves buying a call option and anticipating asset price increases. In contrast, a Short Call option involves selling a call option, banking on price stagnation or decrease. These strategies differ in risk, profit potential, and market outlook, playing pivotal roles in traders' portfolios.
Short straddles involve selling a call and put with the same strike price. For example, sell a 100 Call and sell a 100 Put. Short strangles, however, involve selling a call with a higher strike price and selling a put with a lower strike price. For example, sell a 105 Call and sell a 95 Put.
A short call is a single-leg, bearish options strategy with undefined risk and limited profit potential. Short calls are profitable if the underlying asset's price is below the strike price at expiration.
Example of a short call
Let's say that stock DEF is trading at $20 per share. You can sell a call on the stock with a $20 strike price for $2, and the option expires in six months. One short call contract yields a premium of $200, or $2 * 1 contract * 100 shares.
You write a short call option for a buyer. The call gives the buyer the right to buy the underlying security at the strike price before the contract expires. The buyer pays you a premium, obligating you to deliver the shares if the buyer exercises the option.
Risks of the short call option strategy
The most significant risk is the potential for unlimited losses if the underlying asset's price rises substantially. This makes risk management crucial.
Now we will look at a commonly traded strategy, referred to as a butterfly. Going long a butterfly, the trader buys a call of a low strike, sells two calls of a middle strike, and buys a call of a high strike. The three strikes are equidistant. The options have the same expiration and the same underlying product.
The maximum profit of the strategy is limited to the price received for selling the call option. The maximum loss is unlimited because the price of the underlying stock may rise indefinitely.
The Bottom Line. The writer of a short option is making a bet that the stock underlying the option will decline in price before the option expires. Win or lose, the writer collects a premium, or fee, for selling the option. But losing this bet can mean unlimited losses for the writer.
Short call B/E = strike price + initial option price
For example, if you sell a 45 strike call option for 2.88 per share, the break-even price is 45 + 2.88 = 47.88 as in the example below. The trade is profitable if underlying price ends up below this point.
Shorting is a strategy used when an investor anticipates that the price of a security will fall in the short term. In common practice, short sellers borrow shares of stock from an investment bank or other financial institution, paying a fee to borrow the shares while the short position is in place.
In a contact center, a short call refers to customer interactions less than 10 seconds long.
For example, if a stock is currently trading at $100, you might buy a call option that gives you the right to buy the stock for $105 a year from now. If the stock moves above $105, you might exercise your option and take advantage of the difference between the price you bought in at ($105) vs. the current price.
A call option is ITM when the strike price is below the underlying stock price. Short selling typically involves borrowing a security from the brokerage, selling it on the open market in anticipation of a move lower, and buying back and returning the borrowed shares later.
1. Covered Call Writing. Covered call writing is a strategy where the trader owns shares of a stock and sells a call option on the same stock. This approach allows the trader to generate income from the option premium while holding the underlying asset, effectively reducing the cost basis of the stock.
Also called the 1-3-2 butterfly spread, it is a common variation if the butterfly spread involving buying one option at a lower strike, selling three at a middle strike, and buying two at a higher strike. This advanced options trading strategy offers more flexibility.
An iron butterfly is an options strategy where you sell a call and a put option at the same strike price while buying a call and a put option at different, further-out strike prices. This setup is designed to profit when the price of the underlying asset stays within a narrow range, offering limited risk and reward.
Example of a Short Call
Ms X is bearish about the Sensex and expects it to fall. She sells or shorts a call option with a strike price of ₹1,000 at a premium of ₹120 when the current Nifty is at 1,094.
This balance between controlled risk and a high chance of earning some profit is why the bull put spread is considered one of the lowest-risk options strategies. It allows you to define your risk and reward clearly while taking advantage of favorable market conditions.
The riskiest options are uncovered ("naked") calls. That's when you don't already own the security (or enough of the security) to sell the buyer if he or she chooses to exercise the call.
As its name indicates, a short call option is the opposite of a long call option. In a short call option, the seller promises to sell their shares at a fixed strike price in the future.
Investors can be short calls or short puts. In those cases they would roll their options by doing the opposite — buying the short call or put and selling a similar contract. The purpose of rolling is to adjust an existing position. The new position keeps the same directional bias and structure.
Breakeven. The breakeven on a short call option is calculated by adding the premium to the strike price. If a stock is trading $100 and an investor wants to sell a 110-strike price call for $2.00, then the breakeven would be $112.00.