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Basic Option Strategies: Short Call Option Strategy (Part 2)

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In , we explained about Long Call. In the second part of this article, we take a look at another basic option strategy which is called Short Call.

About Short Call Strategy

Short call means to sell one (or more) call option. Selling option is also known as writing an option. Short call is used when an option trader expects the price of the underlying asset to drop significantly below the strike price before the option expiration date (American-style) or at the expiration date (European-style).

The chart below shows that if the underlying asset is below the strike price at expiration date, the seller’s profit will be the premium earned from selling the the option contract. However, if the market rises then the seller will have unlimited loss.

Short call is considered a risky option strategy. Because of this, it is only suitable for experienced option traders that strongly believe the price of the underlying asset will fall or remain flat.

The calculation formula for short call strategy is as follows:

[(Market Price at Expiration – Strike Price) x (Contract Size)] + Premium Received

This chart and table illustrates the profit and loss assumptions for different market prices at the expiration date.

Short Call Option Strategy

DETAILS ASSUMPTION
Option Product FBM KLCI Index Option (OKLI)
Underlying Asset FBM KLCI futures (FKLI)
Current Market Price E.g. ≤ RM 1,600
Strategy Sell 1 Lot of OKLI at RM 1,600 (The Strike Price)
Call Option at RM20 (The Premium)
(In-the-money)
Premium = Premium Received x Contract Size
= RM20 x 50
= RM 1,000
Breakeven Point RM 1,620

IF MARKET PRICE AT EXPIRATION IS: PROFIT/LOSS ASSUMPTION
1660 = [(RM 1,660 – RM 1,600) x 50] + RM 1,000
= RM 3,000 + RM 1,000
= RM 2,000 (Nett Loss)
1620 = [(RM 1,620 – RM 1,600) x 50] – RM 1,000
= RM 1,000 – RM 1,000
= RM 0 (No Gain or Loss)
> 1620 * If Market Price at Expiration is above RM 1,620, the seller’s losses will be unlimited.

 

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This article is contributed by Wan Zuraiha Zakaria and Jeremy Lim, both of whom are staff writers at Oriental Pacific Futures (OPF). OPF is a futures and options broker based in Kuala Lumpur, Malaysia and provides electronic trading, brokerage and clearing services to retail and institutional traders since 2007. OPF is licensed under the Securities Commissions of Malaysia and offers cash-settled derivatives instruments traded on Bursa Malaysia, as well as select major derivatives exchanges around the world.

Oriental Pacific Futures articles published on the Corporate Website (www.opf.com.my) may be reprinted, reposted or distributed free for educational purposes only on the condition that Oriental Pacific Futures and the Corporate Website link information http://www.opf.com.my are included. However, other organizations are invited to link to articles that are available in the public area of the Oriental Pacific Futures’ Learning Resources website. No additional permission is needed for such a link.

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