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sábado, 20 de diciembre de 2014

Strategies with options: Short Call, sell a call option

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Sellers of a Call option seek to profit from falling prices of the underlying asset or protect their investments against the bearish market swings or even againts market downtrends. These traders have a neutral to slightly bearish view of the market and expect a decrease in the volatility. These operations, called Short Calls, are the opposite of Long Calls (Buying call options).

The biggest disadvantage of a Short Call is the high risk because of their potential loss, which is unlimited for the expiry in a bullish market, while its benefit is limited to the price of the premium.

The breakeven in this trade, is the exercise price +/- the price of the premium. On the other hand, in a Short Call the delta increases to -1 as the underlying asset prices rise.

The more bearish market expectations are, the option must be sold at the deepest In The Money position possible, ie the lowest exercise price must be for the seller of the option.

Example of a Short Call trade

An investor who has 100 shares of ABC believes that market prices will remain stable or fall slightly in the coming months and do not want to sell their shares, but at the same time want to make a profit from these assets during the period in which the market will remain flat or will drop slightly. The current price of ABC is 12.9 dollars/share and the trader sell a call option with a strike price of 12.91 dollars on ABC, which cost a premium of 0.53 dollars.

If the option is exercised, the investor will provide ABC shares from his portfolio, but if not the premium of 0.53 dollars/share will be the profits.

At maturity, the results of this Short Call trade can be:

According to these data, with a stock price highger than 13.44 dollars ($12.91 + $0.53 = $13.44), the losses increase and are limitless when the market price rises. At 13.44 dollars, the trade is in breaks even, while between 12.91 dollars and 13.44 dollars, the losses will increase as the market price rise and below 12.91 dollars, the maximum benefit is equal  to the premium of 0.53 dollars/share.


In conclusion, Short Call trades with options can generate limited gains in bear markets, but the potential for losses in strongly rising markets is substantial. For this reason, the trader should expect  that market conditions are appropriate before selling call options.

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