The short call option strategy is a bearish options trading strategy with a limited profit potential with theoretical unlimited loss. Suited for neutral to bearish outlook. Suitable for experienced traders with approval for highest level of options trading
-Sell 1 call option
Note: like most options strategies, calls can be purchased in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM).
Preference : Sell an 16-20 delta OTM call
-Stock XYZ is trading at $28 a share.
-Sell 30 call for $0.53
Profit and Loss Diagram
Short Call Summary
|Break Even Price||Strike Price + Premium Received|
|Limited to initial premium received|
|Maximum Profit Scenario||Stock stays at below the strike price|
|Maximum Loss Scenario||Stock goes higher than Breakeven Price|
|Why Trade||If you are bearish on a stock you can use this option strategy.|
|When to Trade||Stock Assumption : Bearish|
Volatility : When volatility is high, so you gather more premium to open the trade
|When to Close||When the trade is making 50% of max possible profit|
|Passage of time||Positive. |
With passage of time, the value of this option decreases which is positive for your portfolio
|Increase in volatility||Negative.|
With increase in volatility, the value of option increases.