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."


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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