Learn trading ideas & strategies from TradeKing's experts

Upcoming Live Events
More live events...
Learn it. Trade it.

Open your TradeKing account today!

Upcoming Live Events
More live events...

Short Call

AKA Naked Call; Uncovered Call

The Setup

  • Sell a call, strike price A
  • Generally, the stock price will be below strike A

Who Should Run It

All-Stars only

NOTE: Uncovered short calls (selling a call on a stock you don’t own) is only suited for the most advanced option traders. It is not a strategy for the faint of heart.

When to Run It

You’re bearish to neutral.

The Sweet Spot

There’s a large sweet spot. As long as the stock price is at or below strike A at expiration, you make your maximum profit. That’s why this strategy is enticing to some traders.



About the Security

Options are contracts which control underlying assets, oftentimes stock. It is possible to buy (own or long) or sell (“write” or short) an option to initiate a position. Options are traded through a broker, like TradeKing, who charges a commission when buying or selling option contracts.

Options: The Basics is a great place to start when learning about options. Before trading options carefully consider your objectives, the risks, transaction costs and fees.

The Strategy

Selling the call obligates you to sell stock at strike price A if the option is assigned.

When running this strategy, you want the call you sell to expire worthless. That’s why most investors sell out-of-the-money options.

This strategy has a low profit potential if the stock remains below strike A at expiration, but unlimited potential risk if the stock goes up. The reason some traders run this strategy is that there is a high probability for success when selling very out-of-the-money options. If the market moves against you, then you must have a stop-loss plan in place. Keep a watchful eye on this strategy as it unfolds.

Maximum Potential Profit

Potential profit is limited to the premium received for selling the call.

If the stock keeps rising above strike A, you keep losing money.

Maximum Potential Loss

Risk is theoretically unlimited. If the stock keeps rising, you keep losing money. You may lose some hair as well. So hold onto your hat and stick to your stop-loss if the trade doesn’t go your way.

Break-even at Expiration

Strike A plus the premium received for the call.

TradeKing Margin Requirements

Margin requirement is the greater of the following:

  • 25% of the underlying security value minus the out-of-the-money amount (if any), plus the premium received
  • OR 10% of the underlying security value plus the premium received

NOTE: The premium received from establishing the short call may be applied to the initial margin requirement.

After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying performs, an increase (or decrease) in the required margin is possible. Keep in mind this requirement is subject to change and is on a per-contract basis. So don’t forget to multiply by the total number of contracts when you’re doing the math.

As Time Goes By

For this strategy, time decay is your friend. You want the price of the option you sold to approach zero. That means if you choose to close your position prior to expiration, it will be less expensive to buy it back.

Implied Volatility

After the strategy is established, you want implied volatility to decrease. That will decrease the price of the option you sold, so if you choose to close your position prior to expiration it will be less expensive to do so.

Option Guy's Tips

  • You may wish to consider ensuring that strike A is around one standard deviation out-of-the-money at initiation. That will increase your probability of success. However, the higher the strike price, the lower the premium received from this strategy.
  • Some investors may wish to run this strategy using index options rather than options on individual stocks. That’s because historically, indexes have not been as volatile as individual stocks. Fluctuations in an index’s component stock prices tend to cancel one another out, lessening the volatility of the index as a whole.


Tools

615 Charts
Charts Our flexible charting tool let you zoom from long- to short-term views, layer on technical indicators, draw trend lines and save your work.

619 ETF Center Image
ETF Center Tap into the latest market activity in exchange-traded funds (ETFs), including most-actives, top performers and more.

1326 Maxit Tax Manger Image
Maxit Tax Manager Successful trading is tough enough – untangling the tax consequences of your trades shouldn’t be.

More tools...

Related Strategies

1525 Long Leveraged ETF
Long Leveraged ETF A leveraged ETF’s price is designed to move in multiples of two, three or more times the price movement of its target index. The target index may be broad-based, like the S...

534 Buy Index Mutual Fund
Buy Index Mutual Funds An index mutual fund is typically comprised of most or all of the stocks that make up a particular index. The reason to own an index mutual fund is to take advantage of broad-based bullish activity...

403 Inverse Skip Strike Butterfly w/ Puts image
Inverse Skip Strike Butterfly with Puts You can think of this strategy as a put backspread with a twist. Instead of simply running a back spread with puts (sell one put, buy two puts), selling the extra put at strike A helps to reduce the...

More strategies...