Short Call

A short call means selling a call option. The seller collects the premium up front and keeps it all if the underlying finishes at or below the strike at expiration. In exchange, the seller takes on the obligation to sell the underlying at the strike if assigned. If the seller does not own the underlying, this is an uncovered or naked call, and the potential loss has no upper limit, because prices can rise indefinitely. Short calls are therefore usually traded as part of a covered call or a spread.

Payoff at a glance#

Worked example#

That last outcome shows why naked calls are risky. A single overnight gap on news, such as a takeover offer, can produce losses far larger than many months of premium income.

Why traders sell calls#

• Collect premium when they expect the underlying to stay flat or fall.
• Profit from time decay: options lose value daily, which benefits sellers. See Theta.
• Sell expensive volatility when implied volatility is high relative to expected movement. See Implied Volatility (IV).
• Generate income on shares owned: the covered call. See Covered Call.

Margin and approval#

Brokers require the highest level of options approval for naked calls and charge substantial margin, which can rise quickly as the stock moves against you. A sharp rally can trigger a margin call and forced closing at the worst moment. See Margin.

Safer ways to sell calls#

Early assignment#

Short American style calls can be assigned early, especially when they are in the money just before an ex dividend date. If you are assigned on a naked call, you become short the shares and owe any dividend. See Exercise and Assignment and Early Exercise.

Managing a short call#

• Buy back early when most of the premium has been captured, such as 50% to 75%, to avoid late risk.
• Set a stop based on the option price, such as two to three times the premium received.
• Avoid holding through earnings and major news unless that is the plan.
• Roll up and out to a higher strike and later expiry if challenged, understanding that this extends risk.

Common mistakes#

• Selling naked calls on volatile or takeover candidate stocks.
• Selling calls just because premium looks high, without considering why.
• Ignoring dividends and early assignment.
• Oversizing because most short calls expire worthless; the rare loss can be very large.

Frequently asked questions#

What is a short call?#

Selling a call option to collect premium, with the obligation to sell the underlying at the strike if assigned.

What is the risk of selling a naked call?#

The loss has no upper limit, because the underlying price can keep rising. A sudden gap can cause losses many times the premium received.

What is the difference between a naked call and a covered call?#

A covered call is sold against shares you own, so a rise is offset by gains on the shares. A naked call has no such protection.

Next, learn the bearish counterpart to the long call in Long Put.