Short Call

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.

RELATED TERMS
  1. Short Selling

    Short selling is the sale of a security that is not owned by ...
  2. Short Squeeze

    A situation in which a heavily shorted stock or commodity moves ...
  3. Short The Basis

    A futures strategy involving the purchase of a futures position ...
  4. Short Sale

    A market transaction in which an investor sells borrowed securities ...
  5. Specialist Short Sale Ratio

    A ratio used to determine the sentiment of specialists on the ...
  6. Short Term

    1. In general, holding an asset for short period of time. 2. ...
Related Articles
  1. Professionals

    Helping Clients Navigate Short Sales And Foreclosures

    Both buyers and sellers can benefit from a real estate professional experienced in dealing with short sales and foreclosures.
  2. Fundamental Analysis

    Short Sales For Market Downturns

    This strategy can help in market downturns, but it's not for inexperienced traders.
  3. Active Trading Fundamentals

    Short Sales And Foreclosures: When It's Time To Move On

    Sometimes it's better to cut your losses, but foreclosures and short selling can have devastating impacts on your credit score.
  4. Options & Futures

    Questioning The Virtue Of A Short Sale

    This controversial strategy is blamed for making and breaking markets. Read on to learn more.
  5. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  6. Investing News

    With Short Interest Surging, Is it Time to Buy?

    What do you think the smart money is doing when the market moves higher? Apparently, they're building short positions.
  7. Term

    Three Ways to Profit Using Call Options

    A call option gives an investor the right, but not the obligation, to buy a stock at a specific price, known as the strike price.
  8. Trading Strategies

    Why Is Short Selling Legal? A Brief History

    In the U.S., before a short sale can occur, broker/dealers must have reasonable grounds to believe that shares can be borrowed and delivered on time.
  9. Mutual Funds & ETFs

    The Long and Short of Trading Oil ETFs/ETNs (UWTI)

    Here are several oil ETFs to consider for both shorts and longs.
  10. Stock Analysis

    Are Brick and Mortar Retailers Headed Into Bear Markets?

    The online sales revolution has altered the playing field for brick and mortar retailers, placing them at a disadvantage to purely web-based operations.
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. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  3. Can hedge funds outperform the market?

    Generating returns that exceed those provided by the broader market is the goal of nearly every investor. However, the methods ... Read Full Answer >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center