Short Call

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DEFINITION of 'Short Call'

A type of strategy regarding a call option, which is a contract that allows (but does not mandate) its holder to buy a security (specifically, a stock) at a particular price during a certain future period. Should the holder think the price of the security will fall between now and the day the contract expires, he/she may sell short not only the underlying stock, but the corresponding call option itself: Hence "short call."

BREAKING DOWN 'Short Call'

When an investor takes a short call position, the security's price must fall in order for the strategy to be profitable. Not only must the price fall, it must fall by at least the price of the call option. The farther the fall, the greater the profit. Conversely, should the investor's hunch fail and the security's price thus rise, the strategy loses money for the investor. As there is no boundry for how high the price can rise, the potential losses are unlimited.

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RELATED FAQS
  1. How is a short call used in a collar option strategy?

    An investor uses a short call sold above the current market price to collect a premium in a collar option strategy. The core ... Read Full Answer >>
  2. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  3. How is a short call used in a naked call writing option strategy?

    Selling Naked Calls A trader sells a naked call short at a strike price generally above the market for a premium amount. ... Read Full Answer >>
  4. What options strategies are best suited for investing in the insurance sector?

    Three segments comprise the insurance sector. The largest, property and casualty insurance, exhibits significantly less volatility ... Read Full Answer >>
  5. What are the differences between delta hedging and beta hedging?

    Hedging is used to reduce the risk of adverse price movements in an asset class by taking an offsetting position in a related ... Read Full Answer >>
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    Options trading allows for a multitude of trading strategies, such as option spread strategies. Option spreads are created ... Read Full Answer >>

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