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Short Call Option Strategy

Short Call Option Strategy

What is Short Call Option Strategy?

  • Short Call option is a simple but risky strategy & hence qualified as an advanced strategy. Short Call or Selling Call is recommended when the price of the underlying asset is expected to fall & the stock is not expected to rise further or remain sideways. Generally, we expect the price to stay below the sold strike price.

When to Execute?

  • Short Call can be implemented when we have Bearish biasness, or expecting stock to stay in range with expectation that it will not rise above the sold strike price. This strategy holds undefined risk where we can lose a heavy amount if stock continues to rise above the sold strike price. Short Call gain will be equivalent to the premium received.

What is the Trade?

  • Under Short Call, we can sell any strike price, irrespective of it being ITM, ATM, OTM. When we are selling OTM Call, we are expecting stock to move down so that OTM Call becomes worthless and we earn a premium. Selling ITM Call, indicates extreme bearish biasness.

Breakeven Point

  • Break Even of Short Call = Strike Price + Premium Received

What will be maximum profit?

  • Max profit for Short Call is the equal to premium received.

What will be maximum loss?

  • Short call exposes you to uncapped risk, potential loss could be heavy in case the directional momentum is reversed.

What are the advantages?

  • Profits from falling or range bound stocks. It’s an Income strategy. Helps to generate income if the stock fails to move above call strike. Idle in a scenario where it could be deployed against the case holding.

What are the disadvantages?

  • Uncapped risk. If the stocks rise above short call strike, undefined risk can arise.

Example for Short Call:

  • Nifty future price is 15500. A Short Put can be devised by selling one lot of 15500 PE (ATM) @ 200. Net Premium Paid or Received = Rs. (+200). Uncapped Loss will if market started trading below at 15500 - 200 = 15200, Max premium will be earned if underlying stays above the strike i.e., 15500.