# Short Call Options: Strategy, Risks, and Potential Returns Explained

![Short Call: Selling (writing) a call option with the expectation that the price of the underlying asset will drop.](https://www.investopedia.com/thmb/cdUqn0uyiloPnbmp1LFCAB3T6aM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/short-call.asp-FINAL-1-1-c3cbb30e0aa048b9a4a3b3074e38bb5f.png)

*The seller of a short call profits from the premium received, but faces unlimited risk should the underlying asset's price rise. — Investopedia*

## What Is a Short Call?

A short call strategy in options trading involves a trader selling (writing) a call option, betting the underlying asset's price will fall. While the seller gains a premium, the risk includes potentially unlimited losses if the asset price rises above the strike price, making it a strategy for experienced traders.

### Key Takeaways

*   A short call is a bearish options trading strategy where the seller expects the underlying asset's price to decrease.
*   The seller of a short call profits from the premium received if the option expires worthless due to a decline in the asset’s price.
*   Selling a short call involves unlimited loss potential if the asset's price rises significantly above the strike price.
*   Short call strategies are considered high-risk and are typically used by experienced traders with knowledge in options trading.
*   Writing a covered call involves owning the underlying security to limit potential losses compared to a naked short call.

## Understanding the Mechanics of a Short Call

A short call is a [bearish trading strategy](https://www.investopedia.com/terms/b/bear-position.asp). The option seller, who is called the writer, believes that the price of the stock underlying the option will decrease.

Calls give the buyer of the option the right to buy the underlying security at a specified price (called the [strike price](https://www.investopedia.com/terms/s/strikeprice.asp)) before the option contract expires.

The writer of the call option receives a [premium](https://www.investopedia.com/terms/o/option-premium.asp) paid by the buyer. The writer must deliver the underlying shares to the call buyer if the buyer exercises the option.

### Potential Outcomes of a Short Call Strategy

The success of the short call strategy rests on the option contract expiring worthless. That way, the trader banks the profit from the premium.

For this to happen, the price of the underlying security must fall below the strike price. If it does, the buyer won't exercise the option.

If the price rises, the option will be exercised because the buyer can get the shares at the strike price and immediately sell them for a profit at the higher market price.

### Assessing the Risks for Short Call Sellers

For the seller, there’s unlimited exposure during the length of time the option is viable. The underlying stock's price could rise above the strike price at any time until the expiration date. The option would then be exercised.

Once that happens, the seller must buy the shares at the current price. That price could potentially be much higher than the strike price that the buyer will be paying.

A call by a seller who doesn't already own the underlying shares of an option is selling a [naked short](https://www.investopedia.com/terms/n/nakedshorting.asp) call. To limit losses, some traders will exercise a short call while owning the underlying security. This is known as a [covered call](https://www.investopedia.com/terms/c/coveredcall.asp).

The alternative is to close out their naked short position, accepting a loss that's less than what they'd lose if the option were [assigned](https://www.investopedia.com/terms/a/assignment.asp) (exercised).

![image](https://www.investopedia.com/thmb/LozwyI-pNoSk25ZpmCP3IvMki4k=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Call_Apr_2020-02-cf56d3cf2d424ade8f6001fa23883a3c.jpg)

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## Real-Life Example: Short Call Strategy in Action

Say that shares of Humbucker Holdings are in a strong uptrend and are trading near $100 per share. However, a trader believes that Humbucker is overvalued and will fall to $50 a share.

With that in mind, the trader sells a call with a strike price of $110 and a premium of $1. The trader will receive a net premium credit of $100 ($1.00 x 100 shares).

The price of Humbucker stock does indeed drop. The calls expire worthless and unexercised. The trader gets the full amount of the premium as profit. The strategy worked.

### Pitfalls of a Short Call Strategy

However, it could go the other way. Humbucker share prices could continue moving up. This creates a theoretically limitless risk for the call writer.

For example, say the shares move up to $200 within a few months. The call holder exercises the option and buys the shares at the $90 strike price. The shares must be delivered to the call holder. The call writer must buy 100 shares at the current market price of $200 per share. This is the trader's result:

Buy 100 shares at $200 per share = $20,000

Receive $90 per share from buyer = $9,000

Loss to trader is $20,000 - $9,000 = ($11,000)

Trader applies $100 premium received for a total loss of ($10,900)

> **Fast Fact**
>
> Short calls can be extremely risky due to the unlimited potential for loss if the short call writer has to buy the shares that must be delivered.

## Comparing Short Calls and Long Puts Strategies

A short call strategy is one of two basic bearish strategies involving options. The other is buying [puts](https://www.investopedia.com/terms/p/putoption.asp).

Put options give the holder the right to sell a security at a certain price within a specific time frame. Going long on puts, as traders say, is also a bet that prices will fall, but the strategy works differently.

Say that our trader still believes Humbucker stock is headed for a fall. The trader will buy a put with a $90 strike price for a $1.00 premium. The trader spends $100 for the right to sell shares at $90 even if the actual market price falls to $50.

Of course, if the stock does not drop below $90, the trader will have lost the premium paid for the protection.

## Why Is It Called a Short Call?

[Short](https://www.investopedia.com/terms/s/short.asp) in this case refers to a trading strategy that relies on the expectation that an asset will decrease in price. These traders are "selling it short."

Every short seller needs someone on the buy side who has the opposite view. The buyer will profit only if the price increases.

## Why Would Someone Sell Call Options?

If the trader who sells a call option is correct and the price of the underlying asset decreases, the contract will expire and the transaction will not be completed. But the trader will keep the [premium](https://www.investopedia.com/articles/optioninvestor/09/buying-options.asp#:~:text=Options%20prices%2C%20known%20as%20premiums,premium%20above%20its%20intrinsic%20value.) paid by the buyer for the contract.

## What's a Naked Short?

In a naked short, the trader sells a call option without already owning shares of the option's underlying stock. If the stock increases in price during the term of the options contract, the buyer will exercise the option. That means the seller must buy shares of the stock in the open market and turn them over to the buyer. In return, they'll receive the strike price, which will be much lower.

## The Bottom Line

The short call strategy entails selling a call option with the expectation that the underlying asset's price will decrease. Sellers collect a premium initially but face the risk of unlimited losses if the market price rises significantly. While a profitable move if the option expires worthless, this strategy is highly risky and typically suited for experienced traders. Options trading, given its complexities and potential for substantial losses, generally requires a strong understanding and expertise, making it more fitting for seasoned investors than beginners.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Investor Bulletin: An Introduction to Options](https://www.sec.gov/oiea/investor-alerts-bulletins/ib_introductionoptions.html)."