Name: Short Call

Setup: Sell (short) a call

Bias: Neutral to Bearish


Break-Even: Strike + Premium received for the sale of the call


Max Profit: Limited: To premium received

Max Loss: Unlimited: If the underlying rises above your strike price – loses will occur as long as the underlying continues to rise

Margin: Short call requires no cash outlay so margin is used.  Margin is calculated by taking the greater of:

  • 25% of the underlying security value minus the out-of-the-money amount plus the premium received or
  • 10% of the underlying security value plus the premium received

Time Decay: As time passes the call will drop in value which is what you want.  You want your short call to lose value so it expires worthless or allows you to buy it back (close it) for a lower price.

Implied Volatility: Over the life of the option you want implied volatility to decrease, thus decreasing the price of your option.  An increase in implied volatility will increase the price of your option.

Notes: Short calls can profit no matter which direction the underlying moves.  Losses will only occur below break-even.  Selling deep out-of-the-money calls can return high probability plays.

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