Selling a Call

Also known as Writing a Call or Short Call

A short call option is a bearish strategy where an investor sells a call option, typically when they believe that the price of the underlying asset will decrease significantly before the option expires. The seller of the call option earns the premium paid by the buyer but might incur losses if the asset price increases beyond the strike price.

The short-call option strategy allows investors to potentially earn income through premiums if the price of the underlying asset does not rise significantly. However, it carries the risk of incurring losses if the asset price increases beyond the breakeven point.

Example

Let's say it's January 1st, 2023, and $ETH is trading at $3,000 per token. An investor thinks that the price of $ETH will remain stagnant or decrease in the next few months, so he decides to sell a call option with a strike price of $3,200, expiring on June 1st, 2023. The investor receives a premium of $200 for selling the option to a buyer.

Scenario 1

If, on June 1st, 2023, the price of $ETH is $3,100, the call option will expire worthless since the price is below the strike price of $3,200. The investor keeps the $200 premium as profit.

Scenario 2

If, on June 1st, 2023, the price of $ETH is $3,300, the buyer of the call option can exercise it. This means the investor who sold the call option has to sell $ETH to the option's buyer at $3,200 even though it’s currently trading at $3,300. In this case, the investor loses $100 per token ($3,300 - $3,200) but has received a $200 premium, so the net profit is $100 ($200 premium - $100 loss).

Scenario 3

If the price of $ETH rises significantly, let's say to $3,500, the investor's loss on selling the token at $3,200 would be $300 ($3,500 - $3,200). Since the investor received a $200 premium, the net loss is $100 ($200 premium - $300 loss).

The breakeven point is the price at which the investor neither gains a profit nor incurs a loss. In this example, the breakeven point is the strike price plus the premium received, which is $3,400 ($3,200 + $200).