• Option basics
  • OptionSimple Book Store
  • Option definitions
    • Glossery of option terms
  • What is an option
  • Stock Option Pricing Models
    • Black-Scholes formula
• Bullish outlook
  • Long call
  • Short put
  • Bull call spread
  • Bull put spread
  • Secured put
  • Covered call
• Bearish outlook
  • Long put
  • Short call
  • Bear call spread
  • Bear put spread
• Neutral outlook
  • Long straddle
  • Short strangle
  • Long strangle
  • Butterfly spread
  • Calendar spread
• The Greeks
  • Black-Scholes option pricing model
  • Option Greek Delta
  • Option Greek Theta
  • Option Greek Vega
• resources-tools
  • Option strategy screener
  • Stock option calculator
  • Stock option learning games
  • Expiration calendar
  • CBOE television
  • DayTrader.com
  • The Options Industry Council
  • Option Clearing Corporation
  • Chicago Board Options Exchange
  • Market Watch
  • CNBC
  • Books

 

Short call stock option trading strategy

 

What is a short call?

 

 

The short call option trading strategy is a bearish option position that may be implemented when you think there may be a fall in the price of the underlying security.

 

Call selling is a speculative bearish option trading strategy and should only be impliemented when fair consideration has been given to proper risk management. Given the fact that you are in effect, maintaining a short position, at any time if assignment occurs the trader or investor that maintains this position will be short the underlying stock.

 

One of the benefits of selling a call option contract is with regard to the credit received when initiating the short position, you can essentially collect premium, as long as you are prepared to be short the stock if the trade goes against you.and assignment occurs.

 

An important consideration when going "short"(selling) call options is the fact that time decay has a positive impact on your options premium. Every day that passes by futher erodes the time (measured through theta) portion of the options price which contributes to a profitable short option position.

 

Also keep in mind that any rise in implied volatility (IV) could have a negitive impact on a short call option position. When selling calls, you are considered short volatility. (Implied Volatility is measured through Vega).

 

(Theta and Vega are very important concepts regarding the purchase and selling of option contracts).

 

The chart above is an illustration of

 

~Sell 1 45 strike call (representative of 100 shares of the underlying) option contract @ $15.00 ask.

 

~Total credit excluding commission=

$1,500 ($15.00x100).

 

~Strike price= $45.00

 

~Breakeven point at expiration=

strike price ($45.00)+

price paid ($15.00)=$60.00

 

~Maximum gain= 1,500

 

~maximum loss= unlimited

 

 

This example illustrates holding the short call option position through the contracts expiration cycle. Remember, at expiration, all that is left in an option contract is the intrinsic value of the option.

 

Many traders choose to close out the position early. As time passes, the value of the short call will decline, which will contribute to a profitable position. The short call may then be closed out for a profit, that is of course if the stock is still below the short call option's strike price.

 

Another important note is the fact that if you are assigned on this position you will be short the underlying stock. If this is not appropriate, the position should than be closed.

 

The short call option strategy allows for much opportunity. Through Proper risk management, knowing the reasons why you entered the trade, as well as your exit strategy, combined with the ability to make the necessary adjustments. One will be well on their way to trading short call options profitably.