what does it mean to short a call
Short Call Strategy:
What is Short Call strategy?
A Short Phone call ways selling of a call choice where you are obliged to buy the underlying asset at a fixed price in the future. This strategy has limited profit potential if the stock trades below the strike price sold and it is exposed to higher run a risk if the stock goes upwards in a higher place the strike price sold.
When to initiate a Short Call?
A Short Call is all-time used when y'all expect the underlying nugget to fall moderately. It would still benefit if the underlying asset remains at the same level, because the time decay factor volition always be in your favour every bit the fourth dimension value of Call option will reduce over a menstruum of time equally y'all reach near to decease. This is a proficient strategy to use because information technology gives you lot upfront credit, which volition help you lot to somewhat offset the margin. But by initiating this position you are exposed to potentially unlimited losses if underlying assets goes dramatically high in price.
How to construct a Short Call?
A Short Call can be created by selling 1 ITM/ATM/OTM call of the aforementioned underlying nugget with the aforementioned expiry. Strike price tin be customized every bit per the convenience of the trader.
| Strategy | Brusk Call Option |
| Market place Outlook | Neutral to Bearish |
| Motive | Earn income from selling premium |
| Breakeven at expiry | Strike price + Premium received |
| Risk | Unlimited |
| Reward | Limited to premium received |
| Margin required | Yep |
| Probability | 66.67% |
Let'southward try to empathise with an Case:
| NIFTY Current market place Price | 9600 |
| Sell ATM Phone call (Strike Price) | 9600 |
| Premium Received | 110 |
| BEP (Rs.) | 9710 |
| Lot Size | 75 |
Suppose Neat is trading at Rs 9600. A Call option contract with a strike cost of 9600 is trading at Rs 110. If yous await that the toll of Nifty will fall marginally in the coming weeks, then you tin can sell 9600 strike and receive upfront premium of Rs viii,250 (110*75). This transaction will result in net credit considering you will receive money in your broking business relationship for writing the Call option. This will be the maximum amount that you lot volition proceeds if the option expires worthless.
And then, as per expectation, if Cracking falls or remains at 9600 past expiration, therefore the option will elapse worthless. You volition not have whatsoever farther liability and amount of Rs 8,250 (110*75) will be your profit. The probability of making money is 66.67% as you can turn a profit in 2 scenarios: one) when toll of underlying asset falls. 2) When price stays at aforementioned level.
Loss will merely occur in one scenario i.east. when the underlying asset moves above the strike price sold.
Post-obit is the payoff schedule assuming different scenarios of expiry. For the ease of agreement, we did not take into account commission charges and Margin.
| On Expiry Bully closes at | Internet Payoff from Sell Buy (Rs.) |
| 9300 | 110 |
| 9400 | 110 |
| 9500 | 110 |
| 9600 | 110 |
| 9700 | 10 |
| 9710 | 0 |
| 9800 | -90 |
| 9900 | -190 |
| 10000 | -290 |
| 10100 | -390 |
| 10200 | -490 |
Payoff Diagram:
Impact of Options Greeks:
Delta: Short Phone call will have a negative Delta, which indicates whatever rise in price will have a negative bear on on profitability.
Vega: Short Call has a negative Vega. Therefore, one should initiate Short Call when the volatility is high and expects it to decline.
Theta: Short Phone call will benefit from Theta if it moves steadily and expires at or below strike sold.
Gamma: This strategy will have a short Gamma position, which indicates any pregnant upside movement, will lead to unlimited loss.
How to manage Take chances?
A Short Phone call is exposed to unlimited risk; it is advisable not to deport overnight positions. Also, one should always strictly adhere to Cease Loss in order to restrict losses.
Assay:
A Brusque Phone call strategy can help in generating regular income in a falling or sideways market but it does behave significant chance and information technology is not suitable for beginner traders. It's too not a good strategy to employ if you await underlying avails to fall speedily in a short period of time; instead one should try Long Put strategy.
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Source: https://www.5paisa.com/blog/short-call-strategy-explained-online-option-trading
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