Short Call
A Short Call is an options strategy where the option seller (the one who has sold the call option) anticipates a decrease in the price of the underlying asset. In this strategy, the seller receives a premium for selling the call option, with the maximum profit capped at the premium received, while the potential loss can increase indefinitely with the rise in the price of the underlying asset.
Definition: Selling a call option is a strategy where the option seller (i.e., the call option writer) expects the underlying asset's price to decline. In this strategy, the seller earns a premium by selling the call option. The maximum profit is limited to the premium received, while potential losses can increase indefinitely as the underlying asset's price rises.
Origin: The history of options trading dates back to ancient Greece, but the modern options market began with the establishment of the Chicago Board Options Exchange (CBOE) in 1973. Selling call options as a strategy became popular as the options market matured and investors sought more risk management tools.
Categories and Characteristics: Selling call options can be divided into two categories: covered call selling and naked call selling. Covered call selling means the seller owns the corresponding amount of the underlying asset to deliver if the option is exercised; naked call selling does not have this coverage, making it riskier. Characteristics include: 1. Earning premium as income; 2. Maximum profit is the premium; 3. Potential losses are unlimited.
Comparison with Similar Concepts: Selling call options is similar to selling put options in that both strategies earn premiums, but the former expects the underlying asset's price to decline, while the latter expects it to rise.
Specific Cases: Case 1: Investor A believes a stock will not exceed $50, so they sell a call option with a strike price of $50, earning a $100 premium. If the stock price is below $50 at expiration, Investor A keeps the $100 premium as profit. Case 2: Investor B sells a call option with a strike price of $60, earning a $150 premium. However, the stock price rises to $70 at expiration, forcing Investor B to sell the stock at $60, resulting in a loss.
Common Questions: 1. What is the maximum risk of selling a call option? Answer: The maximum risk is the underlying asset's price rising indefinitely, leading to unlimited losses. 2. How can the risk of selling call options be reduced? Answer: Risk can be reduced by covered call selling, i.e., owning the corresponding amount of the underlying asset.
