Short Call - At a Glance

Strategy

• Short Call

Alternative Name

• Naked Call
• Uncovered Call

Pre-Requisite Strategy Knowledge

• Long Stock
• Short Stock
• Long Call

Legs of Trade

• 1 leg
• Sell 1 XYZ call

Sentiment

• Bearish

Example

• Short 10 XYZ January 50 calls for $1.45, less fees and commissions

Rule to Remember

• n/a

Max Potential Profit (GAIN)

• Net Premium Collected

Break-Even Point

• The breakeven point occurs when XYZ stock price is trading equal to the strike price plus the net premium collected.

Max Potential Risk (LOSS)

• Unlimited

Ideal Outcome

• XYZ price rises significantly above the strike price plus net premium paid

Margin Requirement

• Yes

Early Assignment Risk

• Equity options in the United States can be exercised on any business day, and the holder of a short options position has no control over when they will be required to fulfill the obligation. Therefore, the risk of early assignment must be considered when entering positions involving short options. Early assignment of options is generally related to dividends, and short calls that are assigned early are generally assigned on the day before the ex-dividend date. In-the-money calls whose time value is less than the dividend have a high likelihood of being assigned.
• The short call strategy has early assignment risk.
• If the stock price is above the strike price of the short call, a decision must be made if early assignment is likely. If you believe assignment is likely and you do not want a short stock position, then appropriate action must be taken. Before assignment occurs, the risk of assignment can be eliminated by: (1) Purchasing the call option to close out your short call position.
• If early assignment of a short call does occur, stock is sold. If you do not own the stock that is to be delivered, then a short stock position is created. If you do not want a short stock position, you can close it out by buying stock in the marketplace. Important consideration: Assignment of a short call might also trigger a margin call if there is not sufficient account equity to support the short stock position.
• Also, if a short option is assigned it creates a short position which may result in hard to borrow securities lending fees.

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