Now that you understand how buying options can be profitable, you are in a position to learn how to profit from the other side of the trade, which is writing an option. In Chapter 7, we discussed a long call. Many of those principles are also helpful in learning a short call because a short-call option profits in an opposite manner. This chapter will provide an overview of a short call, present numerous comprehensive examples, and then move to beyond the basics, including a discussion of rolling and margin.
A short call involves the sale of a call option and is a bearish and neutral strategy. A short call has limited reward potential and unlimited risk. A short call typically increases in value from a rise in the underlying stock or volatility expansion and declines in value from a decline in the underlying stock, time decay, or volatility contraction. Following is a summary profile of a short call.
Profit potential: Limited to premium collected.
Time decay: Positive (theta).
Volatility: Increase is negative (negative theta), decrease is positive.
Theta (time): Positive.
Vega (volatility): Negative.
Breakeven: Stock at strike price plus premium collected.
Margin: Generally, 20 percent standard margin, or portfolio margin for equities.
Exercise and assignment: Can be assigned if in-the-money.
How to exit: Offset in closing transaction, assignment, or let expire worthless. ...