Selling (Short) call options

Selling calls is another very popular strategy with investors. Unlike buying a call, sellers receive premium for undertaking to sell shares at the exercise price of the option. Selling calls is typically used by investors that hold the underlying shares as well as aggressive traders that do not. The risks associated with selling calls with and without the underlying shares are vastly different.

1. Selling calls without the underlying shares

Break-even price: Strike price + Premium Received

Break-even price: Strike price + Premium Received

Neutral to moderately bearish
Sellers expect a gradual fall in the market and lower volatility. The optimal strike (exercise price to sell ) is dependent on one's expectation for the stock. The more bearish the lower the strike or exercise price should be in order to maximise premium income.

Maximum Profit: Limited
Maximum Loss: Unlimited
Net premium: Received
Upside Profit at Expiry: Limited

Your maximum profit depends on the underlying stock closing at or below the strike price of the option. The potential for loss is unlimited which means it is dependant on how far the stock is above the exercise price at expiry. In practical terms the seller of the call may not be able to carry the position until expiry if they have insufficient margin to carry the unrealised loss in which case the client's broker will close the position early.

If volatility increases Negative effect
If volatility decreases Positive effect


2. Selling calls with the underlying shares

Break-even price: Stock price - Premium Received

Break-even price: Stock price  - Premium Received

Neutral to slightly bearish/slightly bullish
Selling call options with the underlying shares is popular with investors that;

1. own the stock and are looking to sell out

2. own the stock and use it as a means of generating premium income without necessarily wanting to sell the shares

Returns vary considerably depending on how frequently call options are sold, the amount of premium received, whether the shares are sold and at what level. Popular with investors that already own the underlying shares or are about to buy into a stock, this strategy is important in managing entry and exits.

Maximum Profit: Limited
Maximum Loss: Unlimited
Net Premium: Received
Upside Profit at Expiry: Strike Price - Stock price + Premium Received

Profit is limited to the premium received and thus if the market view is more than moderately bearish, a Long Put may yield higher profits.