A short call is when you sell a call option to collect premium. It is a bearish to neutral strategy that profits when the stock stays flat or goes down. This guide explains how short calls work and the important differences between covered and naked calls.
What is a Short Call?
A short call means you sell a call option to someone else. You collect the premium upfront. In exchange, you agree to sell shares at the strike price if the option is exercised. You profit when the stock stays below the strike price.
Simple version: You get paid now for agreeing to sell shares at a certain price. If the stock stays below that price, you keep the money and nothing else happens. If the stock goes above, you must sell shares at the strike price.
How Short Calls Work
You sell a call option at a strike price (usually above current price)
You collect the premium immediately
You wait until expiration
At expiration, one of two things happens:
Stock stays below strike: The call expires worthless. You keep the entire premium.
Stock goes above strike: You must sell 100 shares at the strike price. If you do not own shares, you buy at market price and sell at strike (loss).
Example
Stock ABC is trading at $100. You think it will stay flat or drop.
- Current price: $100
- You sell a $110 call expiring in 30 days for $2.00
- You collect $200 immediately (100 shares x $2.00)
Outcome 1: Stock stays at $100. The call expires worthless. You keep the $200 premium. This is your maximum profit.
Outcome 2: Stock goes to $130. You must sell shares at $110. If you do not own them, you buy at $130 and sell at $110, losing $20 per share ($2,000). Your net loss is $1,800 after the $200 premium.
Covered Calls vs Naked Calls
There are two types of short calls based on whether you own the underlying shares:
Covered Call
- You own 100 shares of the stock
- If assigned, you simply sell your existing shares
- Risk is limited because you already own the shares
- This is a popular income strategy
Naked Call
- You do not own the underlying shares
- If assigned, you must buy shares at market price to deliver
- Risk is theoretically unlimited (stock can go up forever)
- Requires high margin and approval level
Warning: Naked calls are one of the riskiest options strategies. A stock can gap up overnight on news, and your losses can exceed your entire account. Most beginners should avoid naked calls entirely.
Why Sell Short Calls?
- Generate income: Collect premium on stocks you own (covered calls)
- Bearish position: Profit when you expect a stock to stay flat or drop
- Time decay: Every day that passes, the option loses value in your favor
- High probability: Out of the money calls often expire worthless
The Risks of Short Calls
The main risk depends on whether it is covered or naked:
Covered call risk: You miss out on gains if the stock rallies. If you sell a $110 call and the stock goes to $150, you still have to sell at $110. You made money, but you left $40 per share on the table.
Naked call risk: Theoretically unlimited. If the stock doubles or triples, you must buy at the high price and sell at your strike. This can wipe out your account.
When to Use Short Calls
- Covered calls: When you own a stock and would be happy to sell at a higher price while collecting income
- As part of spreads: Selling calls as part of a defined-risk spread like a vertical spread
- Neutral to bearish outlook: When you expect the stock to stay flat or decline
Tips for Selling Calls
- Stick with covered calls: Own the shares before selling calls
- Choose strikes carefully: Sell above resistance levels where you would be happy to exit
- 30-45 days out: Optimal time frame for time decay
- Avoid earnings: Stocks can gap up big on earnings
- Have an exit plan: Know when you will buy back the call to close
Short Call vs Long Put
Both are bearish strategies but work differently:
- Short call: You collect premium. Profit is capped. Risk can be unlimited (naked).
- Long put: You pay premium. Profit is large if stock crashes. Risk is limited to premium.
- Short call: Time decay helps you.
- Long put: Time decay hurts you.
Track Your Options Trades
Pro Trader Dashboard automatically tracks all your short call trades. See your premium collected, win rate, and assignment history.
Summary
A short call is when you sell a call option and collect premium. You profit when the stock stays below the strike price. Covered calls (where you own the shares) are a popular income strategy with limited risk. Naked calls (without owning shares) have unlimited risk and should be avoided by most traders. If you want to use short calls safely, own the underlying shares first.
Want to learn more? Check out covered calls for the safe version or naked calls to understand the risks.