Short Call
The Short Call strategy is established by selling a call option, without owning the underlying stock . This is a premium collection strategy that has a limited reward, unlimited risk potential. The call you sell (ITM, ATM, OTM) will dictate the amount of premium received.
The goal of selling or shorting calls is to collect a premium and have the sold call to expire worthless, allowing you to keep the entire amount received for the premium.
The short call strategy is usually
(at least with the smart options traders) done by selling the front month options because the Theta (Time) decay of an option is decays exponentially and the most decay happens in the last 30 days of an option’s life. If the markets permit, this position will be repeated month after month until market conditions call for a change in strategy.
This strategy is not recommended for the individual investor due to the its unlimited risk, limited return profit potential. If your looking to collect premium in a less risky manner, look into bear call spreads or bear put spreads to do this.
Short Call Risk Profile
Composition
Short Call is simply the sale of one call option. Also known as “writing” an option, the short call is
Risk/Reward
Max Reward: Limited to premium received for selling the call option
Max Risk: Unlimited risk. You are also obligated to sell at agreed price.
The break even point is where our chart crosses the horizontal axis on the short call chart. The area of importance is where the “hockey stick” looking part of the chart bends and starts going horizontally. That (horizontal) area is going to be the strike price of our option sold.
When you are a Naked Call Seller, you are obligated to sell at the agreed price. The higher the stock goes the more valuable the call sold will be, thus the more money you loose.
Characteristics
Selling or shorting a call is bearish in nature. It takes advantage of underlying securities such as stocks and EFTs going down. Best used when you are bearish on market direction.
Important
Selling options can be a very profitable venture but be aware, selling naked options can be very dangerous. This is obviously a matter of opinion but if your and individual investor NEVER sell a naked option. Naked calls are considered extremely risky among seasoned option traders due to their limited reward/unlimited risk profile. Sell naked calls at your own risk.
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