This chapter covers the fundamentals of short call options contracts. To get comfortable with the language used when discussing options, watch this video:
When an investor goes short a call, they’re bearish on the underlying security’s market price. Selling a call creates an obligation: if the option is assigned (exercised), the writer must sell the stock at the strike price.
Let’s work through a few examples to understand short calls better:
Short 1 ABC Sep 75 call @ $6
This contract obligates the writer to sell ABC stock at $75 per share if assigned. The writer received $600 for selling the option ($6 premium × 100 shares). The contract expires on the third Friday in September.
The writer is betting ABC’s market price stays at or below $75 through expiration. If ABC rises above $75, the holder may exercise, which can create losses for the writer.
Math-based options questions are common on the exam. They typically ask for potential gains, losses, and breakeven values. Let’s go through each.
An investor goes short 1 ABC Sep 75 call @ $6. The market price rises to $100. What is the gain or loss?
Can you figure it out?
Answer = $1,900 loss
| Action | Result |
|---|---|
| Sell call | +$600 |
| Buy shares | -$10,000 |
| Assigned - sell shares | +$7,500 |
| Total | -$1,900 |
At a $100 market price, the call is $25 in the money ($100 − $75). That’s bad for the seller.
A standard assumption on exam questions is that an in-the-money option is exercised at expiration. If the writer doesn’t already own the shares, they must:
That creates a $2,500 loss from assignment ($25 × 100). The $600 premium received up front offsets part of that loss, so the net result is a $1,900 loss.
The higher the underlying security’s market price rises, the more a call writer loses if assigned. If the market price rose to $125, $200, $250, and so on, the loss would keep increasing. Because there’s no ceiling on how high a stock price can go, the maximum loss for a short call is unlimited.
When an option is sold with no hedge (protection), it’s considered naked. A naked short call is risky because assignment can force the investor to buy shares at the higher market price and then sell them at the lower strike price. Since the market has no ceiling, the potential loss is unlimited.
In future sections, you’ll learn how investors hedge short options. For now, here is a quick list of investments that would cover a short call:
*For a long call to cover a short call, the long call must maintain the same or lower strike price, plus the expiration must be the same or longer.
**A short call is considered covered if a banking institution provides a guarantee letter stating it will cover the costs related to an assignment.
You may notice a pattern in that list: if the writer already owns the shares, or can obtain the shares through something convertible (preferred stock or bonds) or exercisable (rights or warrants), the risk is reduced. In those cases, there’s less (or no) need to buy shares at the higher market price to meet the delivery obligation.
Even though the maximum loss for a short naked call is unlimited, the writer doesn’t automatically lose money just because the option goes in the money. The premium provides a cushion: losses from assignment must exceed the premium before the position becomes a net loss.
Let’s go through another example:
An investor goes short 1 ABC Sep 75 call @ $6. The market price rises to $81. What is the gain or loss?
Answer = $0 (breakeven)
| Action | Result |
|---|---|
| Sell call | +$600 |
| Buy shares | -$8,100 |
| Assigned - sell shares | +$7,500 |
| Total | $0 |
At $81, the call is $6 in the money ($81 − $75). Assuming exercise, the writer buys shares at $81 and sells them at $75, which is a $6 per share loss ($600 total). The $600 premium received offsets that $600 assignment loss, so the investor breaks even.
The breakeven for call contracts can be found using this formula:
Did you notice the breakeven formula for long calls is the same? Since the long and short positions are opposite sides of the same contract, they share the same breakeven point.
If ABC’s market price doesn’t rise too far above $75, the investor can still have a net profit. For example:
An investor goes short 1 ABC Sep 75 call @ $6. The market price rises to $79. What is the gain or loss?
Answer = $200 gain
| Action | Result |
|---|---|
| Sell call | +$600 |
| Buy shares | -$7,900 |
| Assigned - sell shares | +$7,500 |
| Total | +$200 |
At $79, the call is $4 in the money ($79 − $75). Assignment creates a $4 per share loss ($400 total). After including the $600 premium received, the net result is a $200 gain.
Expiration is the best-case scenario for investors writing (going short) options. If the option expires unexercised, the writer keeps the premium and has no further obligation.
An investor goes short 1 ABC Sep 75 call @ $6. The market price falls to $73. What is the gain or loss?
Answer = $600 gain
| Action | Result |
|---|---|
| Sell call | +$600 |
| Total | +$600 |
At $73, the call is out of the money (the market price is below the $75 strike). The holder wouldn’t exercise a right to buy at $75 when the stock is available in the market for $73. So the option expires, and the writer keeps the $600 premium.
A quick way to think about exercise for calls is the phrase “call up.” Calls are exercised only when the underlying security’s market price is above the strike price. That isn’t true here, so the option expires.
A short option position can only earn the premium - nothing more. If exercise occurs, losses start reducing that premium and can eventually turn the position into a net loss.
Writers can also perform closing transactions to exit their obligation before expiration.
An investor goes short 1 ABC Sep 75 call @ $6. After ABC’s market price rises to $79, the premium rises to $9, and the investor performs a closing purchase. What is the gain or loss?
Answer = $300 loss
| Action | Result |
|---|---|
| Sell call | +$600 |
| Close call | -$900 |
| Total | -$300 |
To find the profit or loss on a closing transaction, compare:
That’s a $3 net loss per share ($9 − $6). Since one options contract represents 100 shares, the total loss is $300.
Here’s a visual summarizing the important aspects of short calls:
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