Short call

Short call (naked call/uncovered call)

What is a short call?

If you expect a stock price to go down, you can sell a short call option. These options are a go-to strategy for sellers who want to make a profit from a possible price decline. They can also be used as a part of the short sells strategy that also relies on the stock price drop.

In general, call options allow their holders to buy stocks at a specified price (strike price) and within a limited time period. So even if the holders do not buy the stocks at the strike price before the short call option expires, the seller still keeps the premium paid for the option. Moreover, when you short the call option, you get your profits right away. You can even sell call options on stocks that you do not own at that moment (called naked or uncovered calls).

Of course, this strategy is quite risky since the stock prices can go up instead. In this case, you will be obliged to sell your stocks at a low price and can lose quite a lot of profit. So it is better to use short calls when you are sure the prices are going to fall.

Example of a Short Call

Let’s say you have a stock currently trading at $50, but you really feel that the price is going to drop within the next couple of months. This means that you now have a good opportunity to sell a short call option. So you decide to short a call option with a strike price of $55 for $5.

If the stock price stays under $55, the call option will most definitely expire and you will have both your profit of $5 and your stocks.

But if the price actually rises above $55, the option holder will naturally use it to buy the stocks at the strike price, leaving you with only $5 and without your stocks!


2022-06-27 • Updated

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