← Strategy LabLesson 3 · 3:45
Short call
Summary
Use a short call when you think the stock will stay flat or fall, and you accept a loss with no limit if it rises. You sell the $100 call for $3.45 a share, so $345 is the most you can make, and above $103.45 the loss has no limit. You break even at $103.45 on the last day.
Key terms
- short call
- Selling a call option, collecting the premium now in return for having to sell 100 shares at the strike if asked.
- uncovered (naked) call
- A call sold with no shares behind it, so the loss has no limit if the stock rises.
- margin
- Money your broker holds against what a sold position could lose.
- premium collected
- break-even
- The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.
- gap up
- A jump in a stock's price overnight, for example on a surprise result or takeover offer, before you can act.
Check yourself
Answer each question to see why the right answer is right.
1. You sell the XYZ $100 call for $3.45 a share with no shares behind it. What is the most you can make?
2. Where does the short call break even on the last day?
3. XYZ ends at $110 on the last day. What is your result on the short call?
4. XYZ sits at $100 and days pass with nothing else changing. What happens to your result?
5. What is margin on a short call?
Finished the video and the quiz? .