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What is a Short Call?

 

Summary description: The seller of the call sells to the buyer the right to purchase a certain quantity of the underlying instrument (a share, for example) at a certain price. In other words: The seller is obliged to deliver the underlying instrument at the buyer´s request.
Price expectation: Constant, slightly falling prices with decreasing price fluctuations.
Profit potential: limited to the premium received
Loss potential: unlimited, when prices rise

 

Decreasing price fluctuations reduce the price of options. Option sellers benefit from this development by buying back their sold options at a lower price. For more details please refer to the chapters about option pricing.

Example:

Sale of a call on a share, with an exercise price of EUR 100, at an option price of EUR 4.

When the option expires in the future, profits and losses will be incurred given the following different share price scenarios:

Share price upon expiration of the option Profit and loss of the short call
120 -16 (-20 + 4 received premium)
110 -6 (-10 + 4 received premium)
104 0 (-4 + 4 received premium)
100 +4 (received premium)
95 +4 (received premium)
80 +4 (received premium)

Rising share prices result in close-out costs, as the share has to be bought on the market at a price higher than EUR 100 so that it can be delivered at the agreed exercise price of EUR 100. The premium received reduces this loss.

A profit, which is limited to the received premium of EUR 4, is generated up to a price of 104 (break-even point).

Margin collateral must be pledged for uncovered short option positions at Eurex Clearing (i.e. for short positions which are not covered by shares.)

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