Short Call Options aka Naked Call

Peter November 11th, 2014 at 6:44pm

Hi Pavan,

When you sell an option, you receive the premium straight away. In your case, you will receive INR 10 on the day you entered the position. Your P&L will be still be based on your sold price of 10 but your cash flows in your account will be the different to what you would experience if you bought the option.

I.e. if the market for the option drops to 8 then you have made a profit for the day of 2. However, you don't "receive" any more funds in your account as the maximum you can profit from your sold position is 10.

But, if the market in the option increased to 12 then 2 would be taken out of your account as a daily market-to-market loss.

Now, if you hold the option until the expiration date and the option isn't exercised early (i.e. a European option) then you will keep the entire INR 10 provided the underlying settles below the strike price.

However, if the underlying settles above the strike then your loss will be the difference between the underlying price and the strike price less the INR 10 premium already received.

I assume you're talking about the NIFTY index? I believe the options are cash settled, so no delivery once exercised?

pavan kumar November 10th, 2014 at 9:00pm

Hi everyone,

Am short selling the "call" option on Monday of the last week of expiry at 10 as premium. On Tuesday "call" option will go down to 8 then my profit is 2. But my question what if I hold till the expiry ?

What if I do not cover that 'short call' even after the expiry ?
Will I earn that 10 after expiry???

PS : Currency is in INR. And Thursday is the last day of expiry in indian market.

Peter October 6th, 2014 at 5:34pm

Hi Clara,

No. An option's "moneyness" isn't dependent on the position each trader has in it.

A call option is always in-the-money when the spot price is higher than the strike price and a put option is always in-the-money when the spot price is lower than the strike price.

Clara October 6th, 2014 at 12:57pm

In a short call, if spot price higher than the strike price, then the option is out of the money? And, if spot price lower than the strike price, then the option is in the money? Thanks.

Peter June 2nd, 2014 at 12:16am

Hi Mariel,

Yep, you can indeed close out the option position by entering a buy order on the same contract for the same volume as you are short. Another participant will now either be short the option or be closing out a prior long position.

Mariel May 31st, 2014 at 4:43pm

Peter, thank you for all your hard work on this site. It has helped me learn so much!

Can you answer a question that seems like it should be simple but I am afraid to try it without understanding?

If I sell a covered option at say $5 and two weeks later the option price is $3, can I simply buy the same option at $3 to from someone else to close my original contract?

I see patterns in the market because of volitility where I can pretty well pedict (I think) that the options price will drop.... In fact, the option price tends to drop as the expiry date approaches anyway. Since I don't really care about holding the stock, if it does go up great, I'll keep the $5 sale and hand over the stock. If the options price drops though, I would like to know how to close the contract I sold so I can sell the stock too and use the money somewhere else.

Any help would be amazing!

Thank you!
Mariel

Peter August 2nd, 2012 at 6:08am

Hi Nick,

Sorry for the delay in responding...seems I missed your comment!

If you're short a naked call option and making losses - that means that either the market has rallied or implied volatility has exploded.

Naked calls are tricky - if it were me and I were taking a substantial loss on a naked call option I would seriously evaluate my view on the stock.

If I had a strong view on the stock making a bearish run I would buy put options to hedge your position.

Or you could simply close out your naked call option by buying the same amount of call options.

Whatever you do - don't go and sell more calls ;-)

Peter August 2nd, 2012 at 5:55am

And many thanks Lee for the compliments on the site ;-)

Peter July 30th, 2012 at 5:21am

Hi Scott, I would buy back the calls - if you long the future then you will have downside risk. Although I suppose it depends how strong your view is.

Scott July 29th, 2012 at 6:52pm

Peter, if you currently have short calls and feel there is risk to the upside which is a better tactic? Buying back your short calls or buying long futures?

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