Short Call Options: Strategy, Risks, and Potential Returns

Key takeaways
* A short call is a bearish options strategy where a trader sells (writes) a call option expecting the underlying asset’s price to fall or stay below the strike price.
* The seller receives a premium up front; maximum profit is the premium collected.
* Risk is potentially unlimited for an uncovered (naked) short call because the underlying price can rise without bound.
* Writing a covered call (owning the underlying) limits the practical downside of assignment but caps upside on the held shares.
* Short calls are best suited for experienced traders who understand option assignment and margin requirements.

What is a short call?

A short call is created when an investor sells a call option. The call buyer acquires the right (but not the obligation) to buy the underlying security at a specified strike price before the option expires. The seller (writer) receives a premium and takes on the obligation to deliver the shares at the strike price if the option is exercised.

How it works

• Seller receives a premium immediately.
• If the underlying price stays below the strike at expiration, the option typically expires worthless and the seller keeps the premium (their profit).
• If the underlying price rises above the strike, the buyer is likely to exercise the option. The seller then must deliver shares at the strike price, which may force the seller to buy shares in the market at a higher price (if they don’t already own them).

Example

Start: Stock trading at $100.
Trade: Sell a call with a $110 strike for a $1.00 premium (one contract = 100 shares). Seller receives $100 premium.

Outcome A — favorable:
* Stock falls or stays below $110 through expiration.
* Option expires worthless; seller keeps the $100 premium.

Outcome B — unfavorable:
* Stock rises to $200 before expiration.
* Buyer exercises the call and pays $110 per share. If the seller doesn’t own the shares, they must buy 100 shares at $200 ($20,000) and sell them for $11,000, producing a loss of $9,000 before premium. After accounting for the $100 premium received, the net loss is $8,900.

Risks and considerations

• Unlimited loss potential (naked short call): If the seller does not own the underlying, price increases can produce theoretically unlimited losses.
• Margin and assignment risk: Brokers require margin and can force action if positions threaten account equity. Options can be assigned at any time before expiration for American-style options.
• Limited profit: Maximum gain equals the premium received.
• Volatility and time decay: Short calls benefit from time decay (theta) and lower volatility; rising volatility or strong bullish moves increase risk.

Covered vs. naked short calls

• Covered call: Seller owns the underlying shares. If exercised, seller delivers owned shares — no need to buy at market price. This reduces catastrophic risk but limits upside because sold calls cap the effective sale price of the shares.
• Naked short call: Seller does not own the shares. If exercised, seller must buy shares at market price to deliver, exposing them to unlimited losses.

Short calls vs. long puts

Both are bearish strategies but differ in risk/reward:
* Long put: Buyer pays a premium for the right to sell at the strike. Loss is limited to the premium paid; profit potential can be significant if the underlying falls sharply.
* Short call: Seller receives a premium but faces unlimited loss if the underlying rises. Profit is limited to the premium received.

Why sell calls?

Common motives include:
* Income generation — collect premium when neutral to slightly bearish.
* Covered-call income strategy — enhance returns on an owned stock by selling calls against it.
* Taking a bearish or neutral view without committing capital to shorting the stock.

Bottom line

A short call can generate income if the underlying remains below the strike, but it carries substantial risk—especially when written naked. The strategy is appropriate for traders who understand option mechanics, assignment risk, and margin requirements. For those seeking a bearish options position with defined downside, buying puts may be a safer alternative.