Selling a Call Option

By selling a call option (short call), you are taking on an obligation to deliver (sell) 100 shares of an underlying.  To review the definition of a short call, please refer to ”Introductions to Options“.

The short call is an UNLIMITED RISK strategy with limited reward potential and has a bearish trading bias.  For selling a call option, you receive a credit (premium).

Example:  Let’s say you form a bearish opinion on HP (Hewlett Packard) through your analysis and decide to sell a call option.  With HP at $60, you decide to sell the 65 call for a credit of $3.00, meaning that you will keep $300 if the trade works in your favor.

You have just taken on the obligation to deliver (sell) 100 shares of HP at $65.  As long as HP trades below $65, the short call position will work in your favor, but if HP makes a move to the upside (past $65), then your position could be in trouble.  Because as a seller, you have the obligation to deliver HP stock at $65 regardless of its current stock price on the open market.

Let’s take a look at the risk profile (@ expiration) to fully understand how the short call position functions.

The short call position starts to lose money after it hits the strike price of $65, but the premium (credit) you receive for selling the call option offsets that loss to some degree.  Therefore, the breakeven point for a short call position is the strike price plus the premium received, which in this case will be $68.

HP can trade up to $68 by expiration and you will breakeven on the trade, but if HP trades above $68, then the position will lose money.

Here is a summary of the Short Call Option:

• Limited Reward (Credit received)
• Unlimited Risk
• Breakeven = Strike Price + Option Premium

A short call strategy is very useful when used correctly and I will share those trading techniques in the “advanced strategies” section of the site.