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Short Call
The Short Straight Call may allow an investor to profit from downward movements in the underlying security or index. It uses the exact opposite structure as
the Long Call. If the security or index falls in value, the investor can generally
profit. The maximum profit is the premium received by selling the option. If the
security rises in value, the maximum loss is unlimited.
For use when investor anticipates:
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Declining market/security depreciation
Financial Characteristics:
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Maximum Loss: Unlimited
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Maximum Gain: Credit received by selling the call option
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Break Even: Strike price of the option plus the credit received for the sold
option
Objective:
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Speculative gain
EXAMPLE - Short Straight Call
Currently, XYZ trades at $25/share. The investor believes the stock will fall and
wants to benefit from the downward movement. The investor shorts a Straight
Call option (strike $20) for $6.00/share (1 contract= $600). The maximum loss is
unlimited should the stock prices suddenly rise in price. The maximum loss would
be calculated by taking the closing price at expiration less the strike price, less
the credit received on the sale of the option. If the stock closes at $32 on expiration, there will be a $6 loss ($32-$20-$6=$6 loss). The maximum profit an
investor can receive is the credit received when selling the option. For example,
if the same XYZ 20 strike option is sold for $6, and the stock closes under $20,
the option expires worthless, and the investor can pocket the entire $6. The
break even point for the strategy occurs when the price of XYZ is at $26.
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