what is selling a call option

1. The short call option strategy, also known as uncovered or naked call, consist of selling a call without taking a position in the underlying stock. For those who are new to options, they should avoid the short call option as it is a high-risk strategy with limited profits.  More advanced traders use a short call to profit from unique situations where they receive a premium for taking on risk. double bottom Let’s take a more in-depth look at the short call option strategy. Investors open the short call strategy when the prediction for the underlying asset is bearish to neutral. Upon making the sale, the trader has an obligation to sell the stock at the strike price if the buyer of the short call exercises the option. This should not be confused with the short put option, where the seller has an obligation to buy the stock at the strike price. In the chart above, once the stock moves past strike price A, the trader starts to lose their profit. Once it moves past the strike price by more than the premium received, they start taking a loss. what is selling a call option

2. The short call is one of the two options strategies a trader can implement to make a bearish bet on the market. The other being buying put option contracts. The seller of a call option is betting that the stock will not go over a specified price (strike price) before the option expires in exchange for collecting a premium. finance chart patterns This type of bear market trade is often placed when a stock has already had a big run to the upside, especially over a short period, and technical indicators, such as RSI or Percent-R, show that it’s overbought. By selling a short call, the trader is obligated to the option’s buyer, thus guaranteeing that they will deliver the stock to the buyer of the call option if the stock goes over the strike price. If the price of the stock stays under the strike price, the short call option holder keeps the entire premium as profit. However, wedge pattern if the stock price rises above the strike price, the long call holder will exercise the option and force the short call holder to go out into the open market and buy the stock at the current market price delivering it to them at the lower price. When to Execute a Short Call

3. Maximum Profit = Net Premium Received The maximum loss for a short call strategy is unlimited, as the stock can continue to move higher with no limit. 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. Profit/Loss

4. If stock XYZ is trading $100 and the investor wants to sell a 110- strike price call option, they can collect a $2 premium to do so. If the stock trades up to $115, they will be forced to buy the stock at $115 and then deliver the stock to the call buyer at the price of $110, losing $5 in the process. bearish pendant But because the option seller received $2 when they sold the call, their net loss is $3. If, however, the stock continues to trade down or never reaches $110, the trader keeps the $2 premium as profit. Example

5. The short call option is an excellent strategy for experienced investors who want to capitalize on selling volatility when markets are overbought. risk reversal trade As time moves on, the premium received decays, allowing investors to either keep the whole premium or repurchase it later for a lower price. Beginning traders should not use this strategy, it is far too dangerous as the maximum loss is unlimited. Besides individual stocks, sometimes investors also like to sell call index options. A reason for trading index options is because they are considered to be less volatile compared to individual stocks. Conclusion