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Short Call Option trading strategy-Bearish Strategy

Short-Call-Option-trading-strategy

Explanation

A short call is a single-leg options trading strategy for traders who believe the market will trade bearish in the short term. Market players who use this strategy go on by selling options. A trader sells uncovered calls, which mean the option writer does not own the underlying asset at the time of sale of contract. The dealer sells option in the hopes that the underlying asset or index price will trade sideways or fall at the time of expiry. The option seller gets a premium for selling a call option, and in exchange for the premium, the option seller acknowledges the obligation to deliver the underlying asset at the strike price on the expiry date. Because the underlying price can increase quickly due to unforeseen volatility, the seller faces limitless risk with a short call option.

Risk

The risk potential with selling call options is unlimited, as the security price can suddenly rise due to unforeseen volatility.

Reward

The maximum reward in executing this option strategy is limited to the premium received only.

Construction

Sell 1 Call Option

Payoff Chart

Option Type Expiry Date Strike Price LTP Action No. Of Lots
CALL 29/03/2023 17150.0 155.2 Sell 1

 

Market Expiry Payoff 1 Net Premium Option Payoff at expiry
16750.0 0.0 155.2 155.2
16800.0 0.0 155.2 155.2
16850.0 0.0 155.2 155.2
16900.0 0.0 155.2 155.2
16950.0 0.0 155.2 155.2
17000.0 0.0 155.2 155.2
17050.0 0.0 155.2 155.2
17100.0 0.0 155.2 155.2
17150.0 0.0 155.2 155.2
17200.0 -50.0 155.2 105.2
17250.0 -100.0 155.2 55.2
17300.0 -150.0 155.2 5.2
17350.0 -200.0 155.2 -44.8
17400.0 -250.0 155.2 -94.8
17450.0 -300.0 155.2 -144.8
17500.0 -350.0 155.2 -194.8
17550.0 -400.0 155.2 -244.8

 

Option Trading Example

Assume the Nifty is trading around 17000 and a trader believes that the Nifty will decline or will not climb above a certain level in the near future due to an announcement from the Reserve Bank of India (RBI). He will trade on  e 17100 Call Option for premium of Rs. 120 to carry out the Short Call Options strategy. For selling or writing the call option, the dealer will receive a premium of Rs 6000 (120*50) in his account.

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    Scenario 1:

    If at expiry, Nifty closes near about or at17050 levels, the trader will profit by keeping the whole premium i.e., Rs. 6000. (120*50).

    Scenario 2:

    if at expiry trader's assumption about the market proves to be wrong and nifty jumps 150 points and reaches 17200 levels; the trader will incur a loss of

    Loss = [(Strike Price - Expiry Price) + Premium Price * 50]

    Rs. 1500= [(-17250+17100) + 120) *50]

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