Author: laksh

This Strategy has a low-profit potential if the stock remains below Leg 1 (strike price) at expiration. However, unlimited potential risk if the stock goes up.

Description

A short call option is a bearish strategy in which an investor sells a call option, receiving the premium as income but also exposing themselves to potential losses if the stock price rises above the strike price, with the maximum profit being the premium received and the maximum loss being theoretically unlimited.

When running this play, you want the call you sell to expire worthless i.e most investors sell out-of-the-money options.

This Strategy has a low-profit potential if the stock remains below Leg 1 (strike price) at expiration. However, unlimited potential risk if the stock goes up. The reason some traders run this play is that there is a high probability of success when selling very out-of-the-money options. Ensure a stop-loss plan is in place if the stock price goes up. 

Breakeven

Leg 1 plus the cost of the put 

Sweet Spot

 A Large sweet spot is when the stock price is at or below leg 1 (strike price) at the expiration date.

Max Profit

Profit is limited to the premium received for selling the call

Max Loss

Risk is theoretically unlimited if the stock keeps going above Leg 1 (strike price).

A long call option is a type of options trade that allows an investor to profit from an expected increase in the price of the underlying asset. In this trade, the investor purchases a call option contract, which gives them the right, but not the obligation, to buy the underlying asset at a predetermined price (the strike price) at any time before the option expires.

How does Long Call work?

If the price of the underlying asset increases above the strike price before the option expires, the investor can exercise their right to buy the asset at the lower strike price and sell it at the higher market price, resulting in a profit. If the price of the underlying asset does not increase above the strike price, the option will expire worthless and the investor will lose the premium paid for the option.

Benefits of Long Call

One of the main benefits of a long call option is the potential for significant profit with limited risk. Because the investor is only purchasing the option and not the underlying asset itself, their potential loss is limited to the premium paid for the option. Additionally, because the investor has the right, but not the obligation, to buy the asset at the strike price, they can choose not to exercise the option if the market moves against them.

Drawbacks of Long Call

One potential drawback of a long call option is that it is a bullish strategy, meaning it only profits if the price of the underlying asset increases. If the asset price decreases or remains unchanged, the option will expire worthless and the investor will lose the premium paid for the option. Additionally, the potential profit from a long call option is limited to the difference between the strike price and the market price of the underlying asset, while the potential loss is unlimited if the market moves against the investor.