Short Call

Short Call

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 26, 2021

Basics Concepts

Context

Outlook

Bearish – You are expecting a fall in the stock price; you are certainly not expecting a rise in the stock

Rationale

To pick up short-term premium income as the stock develops price weakness

Net Position

This is a net credit transaction because you receive for the call option

Effect of Time Decay

Time decay is helpful to your naked sold option, so take advantage of the maximum time erosion. Maximum time decay (or theta decay) occurs in the last days of month before the option’s expiration, so it makes sense to sell one-month or less options only.
Give yourself as little time as possible to be wrong because your maximum risk is uncapped.

Appropriate Time Period to Trade

Last days of month before the option’s expiration

Breakeven = (Call Strike + Call Premium)

Steps to Trading a Long Call

Steps In

Try to ensure that the trend is downward or rangebound and identify a clear area of resistance.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
Hopefully the stock will decline or remain static, allowing your sold option to expire worthless so you can keep the entire premium.
If the stock rises above your stop loss, then exit the position by buying back the calls.
Time decay will be eroding the value of your call every day, so all other things being equal, the call you sold will be declining in value every day, allowing you to buy it back for less than you bought it for, unless the
underlying stock has risen of course.

Exiting the trade

Exiting the Position

Buy back the options you sold or wait for the sold option to expire worthless (if the underlying stock falls and stays below the strike price) so that you can keep the entire premium.

Mitigating a Loss

Use the underlying asset or stock to determine where your stop loss should be placed.

Advantages and Disadvantages

Advantages

If done correctly, you can profit from falling or range bound stocks in this way.
This is another type of income strategy

Disadvantages

Uncapped risk potential if the stock rises.
A risky strategy that is difficult to recommend on its own.

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