What are the characteristics of this option strategy?
Short call positions are opened when you expect the price of an underlying asset to remain the same or slightly fall over a predetermined period of time, and they consist of selling an out of the money call without taking a position in the underlying stock. This strategy caps the amount of money you can make at the premium received, while the potential loss is unlimited, since there is no ceiling on how high the stock can go. It also carries one of the highest margin requirements of any options position, and the broker can issue margin calls as the stock rises.
Is this a bullish, bearish or neutral strategy?
This strategy is technically a Neutral to Bearish strategy as you can profit whether the stock rises slightly, falls or even stays the same. However, as it involves selling Out-of-the-Money calls, it is generally considered to be a bearish strategy.
Is this a beginner or an advanced option strategy?
The Short Call Option Strategy involves a certain amount of technical knowledge, making it more of an advanced strategy. It is important to understand the basics of options trading before attempting to employ this strategy.
In what situation will I use this strategy?
The Short Call Option Strategy is generally used when you expect the price of the underlying asset (such as a stock) to remain the same or decrease over a certain period of time. It can pay when the market goes nowhere, but only for investors who are willing to carry the margin requirement and accept an uncapped loss if the stock rallies instead.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
In general, the Short Call Option Strategy has a high risk profile. It pairs a high probability of a small profit, capped at the premium received, with a low probability of a very large loss, because the loss above the strike is unlimited. It does not limit losses in any way unless it is sold against stock you already own.
How is this strategy affected by the greeks?
The greeks, Delta, Vega, Theta and Gamma, can all affect the performance of the Short Call Option Strategy. The seller is short delta, short vega and short gamma, and long theta, which means time decay works for the position while a rally or a jump in implied volatility works against it, and the delta gets worse the further the stock rises. Delta measures the rate of change of the option’s price given a small change in the price of the underlying asset. Vega measures the change in the option’s price given a change in implied volatility. Theta is a measure of the rate of time decay and Gamma measures the rate of change of the delta given a small change in the price of the underlying asset. All of these factors will affect the outcome of the trade.
In what volatility regime (i.e VIX level) would this strategy be optimal?
This strategy is most effective when implied volatility is high, because the seller is short vega and collects a richer premium for the same risk, then profits as implied volatility contracts. Selling calls when the VIX is low collects the least premium for the same unlimited upside exposure.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting this strategy when the trade goes against you is not difficult, but it does require a certain amount of technical knowledge. If the stock price rises toward or through the strike, the usual adjustments are to buy the call back for a loss, roll it up and out to a higher strike and a later expiration, or buy a higher-strike call to cap the loss, which converts the position into a defined-risk call credit spread. If the stock price falls, the call loses value and can be bought back cheaply to lock in most of the premium.
Where does this strategy typically fall in the range of commissions and fees?
Commissions are low, since the trade is a single contract to open and one to close. The real cost of carrying it is not the commission but the margin the broker holds against an uncapped loss, and the cost of buying the call back or rolling it if the stock rallies.
Is this a good option income strategy?
An uncovered short call does generate premium income, but it is not a low risk way to make money. The gain is capped at the premium received while the loss is unlimited, which is why most traders sell calls only against stock they already own (a covered call) or with a long call above as protection (a call credit spread).
How do I know when to exit this strategy?
The best way to determine when to exit the trade is to monitor the price of the underlying closely and to set the exit before you open the position. Most sellers buy the call back once most of the premium has decayed, and set a hard loss limit, such as buying it back if the price of the call reaches two or three times the credit received, since there is no strike above to stop the loss on its own.
How will market makers respond to this trade being opened?
Market makers will typically welcome this trade as they are always looking to take the other side of a trade. They will likely adjust the spread of the options to ensure that they make a profit on the trade.
What is an example (with calculations) of this strategy?
For example, let’s say that you wanted to enter into a Short Call Option Strategy. With the stock at $42 you sell a single $45 strike call for $2.00 and take no position in the underlying stock. The most you can make is the $200 premium received, which you keep in full if the stock is at or below $45 at expiration. Your break-even is $47. Above $47 the loss grows dollar for dollar with the stock and is unlimited: at $60 the loss is $1,300 per contract.
MarketXLS provides an array of tools to help traders analyze their options trades, like Short Guts Long Guts Option Strategy or Bull Call Spread Option Strategy. Its stream-lined interface makes it easy to quickly collect, analyze and compare data from exchanges, brokers, ticker symbols and more. Plus, you can use it to track the performance of your trades, so you can ensure that you’re making the most of your investments.
Here are some templates that you can use to create your own models
Short Call Option Strategy
Diagonal Spread with Calls Option Strategy
Long Butterfly with Calls Option Strategy
Long Call Option Strategy
Bull Call Spread Option Strategy
Bear Call Spread Option Strategy
Collar Option Strategy
Laddered Call
Bear Put Spread Option Strategy
Risk Reversal Option Strategy
Long Calendar Spread With Calls Option Strategy
Long Calendar Spread With Calls Option Strategy
Iron Butterfly Option Strategy
Short Straddle Option Strategy
Short Strangle Option Strategy
Iron Condor Option Strategy
Short Condor Spread
Short Gut
Short Albatross Spread
Synthetic Short Straddle with Calls
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
Making Sense of Option Time Value
Covered Call Income Generation (With Excel Template)
Reverse Iron Butterfly Options Strategy (Using MarketXLS Template)
Short Albatross & Long Albatross Options Strategy
Short Guts & Long Guts Option Strategy