But, what is a short call all about?
Aside from being a popular derivative contract investment for underlying stocks, short calls are also a great profit-generating strategy.
Let’s talk all about what is a short call below.
What is a Short Call?
In order to develop a full understanding of what shortcall options are, let’s break it down into pieces.
Starting off with the word “options”.
Options are a form of investment with derivative contracts that contain an agreement of trade, the price at which the trade will be exercised, and an expiration date of the validity of the contract itself.
Moving on, the word “call” is a finance jargon that indicates a trader’s right to buy an underlying stock. This is the opposite of the word “put” which is a trader’s right to sell the said underlying stock.
And finally, the word short. In options, the word short does not indicate a short-term investment. Instead, it states a promise or a guarantee of purchase.
Now, let’s put all of that together and answer the question “what is a short call option”.
A shortcall option is simply a derivative contract that obliges a trader to purchase an underlying asset within its validity period.
What is ShortCall Option Strategy?
Now that you know all about what is a short call spread, let’s move on to shortcall options strategies.
The most common short call option strategy is income generation.
This strategy revolves around two profits. The first is the collection of the premium from the buyer.
After doing so, the trader will hope that once the contract expires, the underlying stock would have a market price below the set strike price. Which then leads to the generation of their second profit.
Shortcall options are also a speculation strategy.
Since these contracts allow traders to obtain exposure to the underlying stock for a low price, they take advantage of it by getting significant gains.
And lastly, shortcall options work as a great tax management strategy. These contracts allow them to change portfolio allocations for low prices.
Is ShortCall a Good Strategy?
It depends on several factors, there really isn’t a short call profit formula. A couple of things to consider before diving into this strategy are your preferences, needs, and plans of investment.
Shortcall option strategies are one of the most flexible derivative investments in the market. It allows you to take full control and gives you the right to define the contract based on your preference.
And this brings in the question “what is a margin call on a short position?”
A margin call is a defense triggered by the seller as a response to the security’s price moves against them.
Aside from flexibility, a shortcall option payoff provides plenty of risks, unlimited if you must. This is because the underlying stock’s market price has the potential of increasing indefinitely.
The shortcall option strategy is a suitable and profitable strategy for traders who own underlying securities with prices that are predicted to fall.
Short Call vs a Long Call
We’ve given a short differentiation of call and put options earlier, now it’s time to distinguish shortcall from long call options.
Perhaps the greatest difference between the two is their contracts’ function.
Both contracts contain the agreement of the strike price and expiration date. However, short call contracts promise the purchase of the underlying stock on or before the said expiration date. On the other hand, long call contracts do not guarantee any settlements.
So that means that long call contracts provide a possible unlimited profit and a loss that is solely the premium. While short call contracts provide both losses of the premium and the underlying stock profit.
Is the ShortCall a Bullish or a Bearish Strategy?
Shortcall options are bearish strategies.
This is because shortcall options generate profit not only off of premiums but also from the market’s fluctuations within the contract’s validity.
And bearish strategies are investments that generate profit through a security’s falling prices.
This only means that a short call profit formula relies on the market’s bearish activities.