Sold Call Option

Posted on February 19th, 2010 admin 1 Comment

Writing a call represents a short call, which is a slightly bearish or neutral position. This strategy entails writing (selling) the call option with an obligation to sell a fixed number or amount of the underlying asset to the holder at a fixed price on or before a specific period of time. The trader or investor who executes this strategy is called the writer. The risk inherent of naked call option writing can be extremely high and always carries margin requirements.

The reward in this strategy is limited to the premium received for selling the call option. The risk is unlimited. Writing calls is used if you are bearish on the underlying asset, and is used basically to collect the option premium when a trader or investor feels that the call option contract will expire worthless, or will be worth less than the premium received.

Selling calls has a very useful function when combined with a share portfolio. The strategy is called covered calls. Rather than selling your shares you can sell at-the-money calls and receive a premium. You can use your shares to produce a monthly income and if the share price is above where you sold the call you sell the shares anyway and receive the premium as well. This is a simplified version but in a sideways to up trending market is very profitable. This strategy will be discussed later in the course under a number of strategies including covered calls, collars and income strategy. Please contact me in the meantime if you wish to discuss trading this strategy.

Summary:

Market Outlook Neutral/Bearish
Risk Unlimited
Potential Reward Premium Received
Premium Received at purchase, margin required
Time Decay (Theta) Positive
Volatility (Vega) Negative

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