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Short call

May 3, 2012 ஆக்கம் sknlakshmi

Mr. MS Pillai enquired about short call, given below his mail

 

Dear Sir / Madam,
 
I would like to know what is short call and how it works.
 
Appreciate for your guidance.

M.S. Pillai

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Short call

May 3, 2012 ஆக்கம் sknlakshmi, 1 year 3 வாரங்கள் முன்பு
விமர்சனம்:209

Short call relates to bearish options strategy that involves short selling or "writing" call options. When you short sell, you are actually selling a security without owning it, hoping that you can buy it later when the price falls.  A trader who believes that a stock price will decrease can sell the stock short or instead sell, or "write," a call. The trader selling a call has an obligation to sell the stock to the call buyer at the buyer's option. If the stock price decreases, the short call position will make a profit in the amount of the premium. If the stock price increases over the exercise price by more than the amount of the premium, the short will lose money, with the potential loss unlimited

For example, today you are sure that company X stock price will go down in the next two weeks and it's priced today to be Rs1000, you sell it today at Rs1000 without owning it (you are actually borrowing it from your your broker). In 2 weeks, your broker will ask you what you have borrowed. When the price is Rs5000  on that day in the market, you will buy it and give it to the broker. Your profit will be Rs5000  minus all the cost related to the transaction.

In simple, it is a stock option strategy in which an investor sells a call on shares that are either currently owned (covered call) or not yet owned (naked call).

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