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Option Strategy: Short Call
Derivatives - Options

Hi Friends. I hope you all were able to understand Long Call, the simplest of Options Strategy. Today we will take up an equally simple, yet interesting strategy named – Short Call

So without further ado, let’s understand it.

We can use a Short Call Strategy when we are bearish in the market or a particular type of underlying and we expect the prices to fall. In this strategy we sell the Call in the assumption that the underlying will come down sharply. This position offers limited profit potential and the possibility of unlimited losses in case the rates of the underlying increases significantly.

Though the strategy is very simple and easy to understand, execute and profitable, please remember that this strategy has unlimited risk compared to very limited profits.

When can we use this strategy??

We can use this strategy when we are bearish about a particular stock or index. The reason for using this strategy is that there is a high probability for success when selling very out-of-the-money options.

Risk involved while using this strategy

Unlimited Risk is involved if the index or stock shoots up

Benefits of using the strategy

Limited profits. Maximum profit will be the premium at the time of writing (selling) the call.

When can we achieve the breakeven?

The break-even point for us will be Strike Price + Premium

Example

NIFTY is currently trading around 8400. Let’s assume you are extremely bearish on NIFTY. So you sell one lot of current month Call with 8200 strike price at a premium of Rs. 150.

If the Nifty goes at or below 8300, the call option will not be exercised by you and you will be able to retain the maximum premium of Rs. 150 as profits . In case the Nifty stays above 8300, you will incur an unlimited loss of {(Strike Price – Expiry Price) + Premium}




The Analysis of the Strategy

We use this strategy when we highly expect a fall in the price of the underlying. But his is a risky strategy as our profits are extremely limited (Rs. 150 in this case) but the losses are unlimited as we tend to lose a lot of money if the underlying index or stock keeps moving up.

Therefore this strategy should either be used when we are certain that the underlying will go down or with a stop loss.

We hope that you are finding our new series on Options Strategies Informative as well as interesting. We will soon come up with another strategy, so stay tuned and keep leaning.

Have a happy time trading folks.

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Pratyush DixitConsultant - Digital Marketing and Content

Pratyush is a Post Graduate in Marketing Management and has a leadership experience of nearly a decade in diversified industry including Stock Broking. Having headed companies for over half a decade, Pratyush brings with him, rich Marketing and....

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