Construction: Sell 1 call option.
Function: Directional, premium collection.
When To Use: At Market Rebellion, we ALWAYS define our risk before entering a trade. So, we NEVER short call options “naked” (without being hedged by long stock or as part of a larger spread) because the strategy can theoretically incur unlimited losses as the underlying stock can rise infinitely.
Breakeven: Short call breakeven is calculated by adding the premium received to the options strike price.
Max Gain: The maximum gain for a short call option is limited to the credit received from selling the option.
Max Loss: UNLIMITED.
Key Concepts: A short call is a bearish, single-option strategy in which the option seller believes the price of the underlying stock will be below the strike price at or prior to expiration.
Example: With a stock trading at $200, a trader sells the $210 strike call option to collect $2 in premium. If the stock never reaches $210 by expiration, the trader keeps the $2 premium as profit. However, if the stock rises to $220 by expiration, the trader will be forced to buy the stock for $220 and delivering the shares to the call buyer at the price of $210 for a net loss of $8.