Short Call
Candlefocus EditorThe goal of the trader who sells a call is to make money from the premium. A call option gives the buyer of the option the right to purchase the underlying shares at the strike price before the contract expires. When an investor sells a call option, the transaction is called a short call. The seller of the call receives the premium upfront and is obligated to deliver the underlying shares to the buyer if the option is exercised. The idea is that the option will expire worthless, allowing the trader to collect the premium without having to actually purchase the stock.
In the short call strategy, a trader will have the opportunity to make a profit while at the same time limiting the downside losses. With a short call, profits are limited to the premium received, while potential losses can range up to the strike price minus the premium received. As a result, traders need to have a clear idea of how much they’re willing to risk in order to reap any potential rewards. The move should only be made with a stock that is expected to decline, since the potential downside losses can exceed the potential gains.
The short call strategy is an effective way of manipulating and profiting from stock prices. Rather than buying and holding a stock, the trader is able to sell a call contract at a price he or she is comfortable with, and collect the premium. This can be done in tandem with other strategies in order to spread the risk and maximize gains. As with all investing strategies, it is important to do research and understand the underlying fundamentals of the stock, commodity, or security being traded. Knowing the risks associated with a strategy and keeping them in perspective will always help you stay ahead of the game.