Short call option in the money
The short call option strategy is primarily a bearish to neutral options trading strategy that capitalizes on premium decay, downward moves in volatility, and downward moves in the underlying asset. Short call option in the money calls also works with slight positive movement in the underlying asset.
Due to the highly risky nature of short call, most options brokers require special approval to trade this strategy because of the theoretical unlimited, or undefined, potential loss. Unlike short putsselling short calls can never be covered unless the seller owns the appropriate amount of the underlying asset; if the underlying asset is owned, the strategy is called a covered call.
If a trader sells a put, there short call option in the money always a defined loss for the trade. The maximum loss for a naked short call is theoretically unlimited, so short calls are, by definition, naked uncovered options positions. This is an interesting question. A lot of traders will go their entire trading careers without ever selling a call because of the stigmatized risk. Nevertheless, there are plenty of options traders who look to exclusively sell premium, and short calls are often their go-to strategy.
When selling naked or covered puts, there is always the risk that the underlying asset will crash and go to zero. If this were short call option in the money occur, it would be truly devastating for a short put position.
The possibility, however slim it may be, that an asset can crash down, is usually always priced into puts, and this is why puts tend to trade richer than calls. Basically, when you sell calls, you mitigate the risk of a widespread market crash wiping out the underlying asset.
The only exception to this upside vs. Selling calls on commodities, i. Upon a rare occasion, particular commodities like corn, soybeans, wheat, etc. These natural events can cause an extreme supply shortage and send the prices of commodities skyrocketing. This short call option in the money where call premium sellers run into trouble.
Of course, margin requirements for short calls also depend on the underlying asset itself. Very volatile stocks can have higher requirements. Short call options on futures work under SPAN margin in the US, and this is typically equivalent to portfolio margin for individual stocks. The best way to determine the margin impact for selling calls is to preview the order before transmitting it on a live account.
It depends on how many days there are until expiration, short call option in the money time premium has to be priced out of the calls. In fact, collecting this premium is what drives most traders to sell calls in the first place. Once a short call gets deep enough in-the-money, theta will have less and less of an effect on the price of the call. Short calls on US stocks that are ITM can technically be exercised at anytime prior to expiration by the option buyer.
Although this is highly unlikely, it is possible and has definitely happened to options traders who write for The Options Bro. Similarly, for writing calls on individual stocks, if there is not enough stock available to borrow, or there is a hard-to-borrow fee, this can create a predicament as well. Regardless, everything can be avoided my properly monitoring expiring positions.
Expiration details for options on stock indices and futures vary, but as a premium seller it behooves you to stay on top of all ITM short options positions that are approaching expiration. Selling calls can be a great way to capture option premium. With short calls that are OTM, money can be made if the stock moves up slightly, does nothing, or declines dramatically. Sharp increases in volatility and the price of the underlying asset can wreak havoc on a short call position.
Having said that, sharp decreases in volatility and decreases in the price of the underlying asset, in addition to theta decay, can make selling calls very profitable. Options Bro March 7, Why Trade Short Calls? What About Theta Time Decay? When should I close Out a Short Call? Anything I should Know about Expiration? Important Call Selling Tips Selling calls can be a great way to capture option premium. Summary Short calls are a bearish strategy that capitalize on theta decay and declines in the underlying asset The max loss for short calls is theoretically unlimited, but in exchange the likelihood short call option in the money profit is very high Ally Invest is the cheapest and best broker to trade short calls GET STARTED on Ally Invest's site.