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).
