Short call, also known as uncovered or naked call, is selling a call without taking a position in the underlying stock. If you are new to options trading, then short calling is not an option strategy for you. It is a high-risk strategy with limited profits in the form of the premium received for selling the call option. Let’s take a more in-depth look at short calling.
Short calls are made when the prediction for the underlying asset is bearish to neutral. Upon making the sale, the trader will need to sell the stock at the strike price.
With this strategy, it’s in the investors interest if the call option has no value at expiration. When executing the option strategy, it’s a good practice to wait until the strike price is one standard deviation out of the money (the stock price is lower than the strike price). However, the strike price well negatively affect the premium you will get.
With a short call, the trader also wants the implied volatility (IV) to decrease because this will reduce the price of the option they sold. So, if they decide to close before expiration, the trade will cost them less than if the implied volatility is high. Similarly, decreasing time to expiration is also a positive factor with this strategy, because, in case of closure at expiry, they benefit if the price of the sold option is decreasing.
Maximum Gain = Net Premium Received
The maximum loss for a short call strategy is unlimited as the stock can continue to move against the trader with no limit.
The breakeven on a short call option is calculated by adding the premium from the strike price.
If a stock is trading $100 and an investor wants to sell a 110-strike price call for $2.0, then the breakeven would be $112.00.
If stock XYZ is trading $100 and the investor wants to sell a 110- strike price put 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 $1115 and then deliver it to the call buyer at the price of $110, losing $5 in the process. But because they received $2 when they told 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.
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.
The potential for profit with this strategy is low if the stock price remains below the strike price. Also, the risk, in theory, at least, is unlimited if the stock rises. Traders prefer to sell calls because the possibility of profiting from it is high if the option is very out of the money.