A short call option is an options trading tactic used by traders to shield their portfolios from losses and to gain income from options trading. A call option gives the purchaser the ability to buy a certain amount of a security at a set date but not the obligation. If the buyer sells the call option to another broker, a short call option is a short call option. The seller’s option premium is the highest amount of money that can be earned from the offer.
If offering a call option, the trader assumes the obligation to offer the underlying protection at the strike price if the option is exercised. This means that the trader must be able to provide the underlying security at the option’s strike price at the time of expiration.
To the premium paid, the potential gain from a short call option is limited. If the option is not activated, the trader will keep the entire price intact. The risk of a short call option is unlimited, and it is dependent on how much the underlying security’s market price rises. If the underlying security rises at a much cheaper price than the strike price of the option, the trader will lose money on the deal.
Setting a stop-loss order can minimize the danger of offering a call option. A stop-loss order is the order to close a trade at a predetermined loss threshold. If the market price of the underlying security rises above the stop-loss rate, the deal will be closed and the trader will incur the most losses.
When setting up a short call option plan, traders will consider the time until the option’s expires, the option’s strike price, the option premium, and the current market price of the underlying security. The trader may also consider the possibility’s inherent volatility and the trading volume.
By knowing the basics of a short call option, traders can gain wealth and hedge their portfolios against losses.