Short Call

  

Categories: Derivatives, Trading

"Hi, honey. Home at 6. Pickin' up chicken." That's a short call, but it has nothing to do with this term.

A call offers its holder the right, but not the obligation, to buy a certain underlying asset. There are two sides to that arrangement. One side buys the call; they have the option to purchase the underlying asset at a pre-set price. Meanwhile, on the other side of the deal, there is a party who wrote the call option. That investor has granted the right for someone else to buy the asset. To put it another way, they're agreeing to sell the asset at the pre-set price.

The short call exists on that side of the equation. It represents the writing of the call option.

You write a call for 100 shares of AAPL at $210, expiring in two months. You sell the option to someone else. Now you owe them those 100 share two months from now, if they choose to exercise the option.

Sometimes, people who sell these options already have the underlying asset in hand. In that situation, you'd already own 100 shares of the AAPL stock...you just want to use the option to raise a little money. If shares rise to the point where the call option gets exercised, it's no big deal. You have to sell the stock at the agreed-upon price, which might be below the current market value. But you still made a profit on the exchange.

Other times, the investor doesn't already own the stock. This situation represents a classic short call. Here, you really don't want the shares to rise above the strike price. You sell the AAPL call with a strike price of $210 and shares rise to $225; the buyer exercises the option. Now you have to buy 100 shares at $225 just to sell them to someone else at $210. Losing proposition.

For that reason, a short call is basically a bet that the stock will stay below the contract's strike price. The investor is looking to earn a premium from selling the option, but they have their fingers crossed that it never gets exercised.

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finance a la shmoop what is a short sale and what is shorting stock

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alright you sell a footballer's short when you mumble something about them [Guy looking angry in a sports bar]

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never making it to the NFL right think about that all you recruiters who picked [The guy gets punched]

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have to recognize his real value to the game alright well the same gist is true

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with stocks you sell Facebook short because you think the stock is [Stock trader surronded by screens]

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overpriced you don't like zucks politics and the

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government will regulate the company because of it or because well you just

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think that kids who quote made Facebook unquote have migrated to competitors or [Goat going to use a computer]

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well they just like the outdoor all right well the process of shorting well [Goat walking around in a field]

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you call your broker explain what you want to do she quotes you the borrow or [Defintion of a borrow]

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price at which she will loan you shares of Facebook so that you can then sell

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them short like say it's a 1% a month it's kind of a borrow number the borrow

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was way more expensive than normal margin rates like that's 12 percent a [Borrow calculation shown]

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year if you're doing the fancy math there and then you just go ahead and

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virtually sell say yeah a thousand shares of Facebook at four hundred bucks

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a share sold them short four hundred thousand dollars short position on

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Facebook if the stock then goes up 30 bucks well guess what your 30 grand in [Stock chart for facebook showing price increasing]

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the hole and that shows up structurally as margin encroachment yeah we like [Big red arrow pointing to the margin encroachment]

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football terms and the ticker is FB after all right so if your entire

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suddenly drop a hundred bucks well then you've [Stock chart showing price plummeting]

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shorted it right you shorted it four hundred down to three hundred you're a

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