Vega trader

Short call

Short call is a one-legged, risky, bearish option strategy with limited risk. Buying a call option is an alternative to buying stocks with leverage. The chart below shows a short call option strategy with a strike price of 100 and a price of 5 and a profit/loss diagram.

Orders(1)

Profit/Loss chart

At expiration Mark-to-market (model)
$-1296.14$-1041.29$-786.44$-531.59$-276.73$-21.88$232.97$487.82$742.67 $83.50$87.17$90.83$94.50$98.17$101.83$105.50$109.17$112.83$116.50 $105.00
5% 150%
0 30

The smooth curve uses Black–Scholes (European-style, flat rate); adjust IV and time to explore sensitivity. Does not model dividends or early exercise.

1% 100%
Increases or decreases the price range on the chart for better overview

Greeks and this strategy

Greek How it behaves
Delta Negative. You lose when the stock rises; delta magnitude increases as price moves toward and through the strike.
Theta Positive. Time decay benefits the short call when the stock stays below the strike.
Gamma Negative. Delta becomes more negative on rallies, increasing losses on upward moves.
Vega Negative. Falling implied volatility helps; rising volatility increases the cost to buy back the short call.

Overview of short call

Short call options give the buyer the right, but not the obligation, to buy stocks of the underlying asset at the strike price within or before expiration. Since options are leveraged investments, each contract is equivalent to owning 100 stocks (relevant for the US market). The advantage of using a short call option is that it requires less capital compared to the costs of owning 100 stocks, and the risk of loss is limited to the cost of the option contract.

Market prospects of short call

A short call is bought when the buyer believes that the price of the underlying asset will rise by at least the cost of the option at expiration. Further out-of-the-money (OTM) strike prices will be cheaper, but with a lower probability of success. The further the strike price is out of the money, the more bullish the trader is, buying a call option. But the potential profit in this case is much higher.

How to open a short call position

The position of a short call is opened when the buyer buys a call option contract. Calls are listed in the option desk and provide the corresponding information for each strike price and available expiration time, including the bid and ask prices. The cost of entering into a trade is called the premium. Market participants consider several factors to assess the value of an option premium, including the strike price relative to the stock price, time to expiration, and volatility.

Profit/loss diagram for a short call

The profit/loss diagram for a short call is simple. The maximum risk is limited to the cost of the option. The potential profit is unlimited. To break even at expiration, the stock price must fall below the strike price by the cost of the short call option. For example, if a short call option with a strike price of $100 is purchased for $5.00, the maximum loss is determined to be $500, and the potential profit is unlimited if the stock continues to fall. However, the underlying stock must be below $95 at expiration to realize a profit.

How to enter a short call position

To enter a short call position, a buy order (BTO) is sent to the broker. The order is either executed at the ask price (market order) or at a specific price that the investor is willing to pay (limit order). Buying a call option results in a deduction of funds from the trading account.

How to exit a short call position

There are several ways to exit a short call position. At any time before expiration, a sell order (STC) can be entered, and the contract will be sold at the market price or at a limit price. The premium received from the sale will be credited to the account. If the contract is sold for a higher premium than the initial purchase, a profit is realized. If the contract is sold for a lower premium than the initial purchase, a loss is realized. If the short call option is in the money (ITM) at expiration, the holder of the contract can exercise the option and receive 100 stocks at the strike price. If the short call option is out of the money (OTM) at expiration, the contract expires worthless, and a full loss is realized.

The impact of time decay on a short call

The remaining time to expiration and implied volatility constitute the extrinsic value of the option and affect the price of the premium. Under the same conditions, option contracts with a longer time to expiration will have higher prices because there is more time for the option to be in the money (ITM, in the money).