What is a short call option?

A short call option, also known as writing a call option, is an options trading strategy where an investor (the seller or writer) sells a call option contract to another party (the buyer or holder). In this scenario, the seller has an obligation to sell the underlying asset to the buyer at the predetermined price (strike price) if the buyer decides to exercise the option before or on the expiration date.

When an investor writes a short call option, they receive a premium upfront from the buyer. The premium represents the income the seller earns for taking on the obligation to sell the underlying asset. The seller profits from a short call option if the price of the underlying asset remains below the strike price or does not increase significantly beyond the strike price before the option's expiration.

However, writing a short call option comes with unlimited risk because there is no limit to how much the underlying asset's price can rise. If the price of the underlying asset surges significantly above the strike price, the seller may face substantial losses. To limit the risk, investors can use various risk management strategies, such as buying a call option at a higher strike price (covered call) or implementing stoploss orders.

Short call options are commonly used in options trading as part of various options strategies, such as covered calls, naked calls, and vertical spreads. Traders may use short call options to generate income, hedge against potential losses in their existing positions, or express a bearish view on the underlying asset. However, it is essential for investors to understand the risks involved and have a thorough understanding of options trading before engaging in short call option strategies. Options trading can be complex and may not be suitable for all investors.