Short Call Option also called as Naked Call option and this means you sell a call option. Selling is also called writing. This call is used when you are uncertain of the volatility and you are bearish on the market. Sell ATM calls if you are confident that the market will not move much or it will fall. Sell OTM calls if you are less confident of the market will fall. This strategy is Market Neutral, slightly bearish and has unlimited risk.
Maximum gain is limited to the premium collected and maximum loss is unlimited
When the underlying asset price falls, price sensitivity position increases by the value Delta
With the passage of time, the time decay position profit increases by the value of Theta.
When the market moves up, loss increases. For each point the market is above the breakeven point at maturity, loss increases by one point. If the spot price is more than the strike price on the day of expiry, the buyer will exercise the option on the seller and the seller of the option will make loss. Higher the spot price more is the loss for the seller. If the spot price is less than the strike price on the day of expiry the buyer will let his option to expire un exercised and the seller will get to keep his premium.
Position benefits from time decay. The option seller’s profit increases as option loses its time value. Maximum profit from time decay occurs if option is ATM.
Suppose you own the 10 shares of Lockheed Martin Corp.(LMT) trading at NASDAQ @ $250/share. And you are not interested to sell in soon as you don’t expect any upward price movement of the stock. You decided to sell the call option expiring in 3 month @ the strike price of $280 for $3.80. Each contract(lot) of LMT is 1000 shares of underlying stock. $3.80*1000=$3800. This is the premium amount you get at minimum as the commission. In addition to this, you get $30($280 -$250 =$30) per share at the day of expiry.