"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.
Related or Semi-related Video
Finance: What is Short Interest Theory?3 Views
finance a la shmoop what is short interest theory no this is not about
goldfish attention spans or shmoop writer attention spans either for that matter[Goldfish in ocean appear]
and yes that would be no this is not about goldfish attention spans but if we
know this is not our you can get the idea
all right short interest theory is yet another investing theory this one
basically says Zig one other's zag or rather the theory involves the float or
the trading totals of shares in a given company that is that if ten twenty maybe [Stock daily trading volume chart appears]
thirty percent of the stocks daily trading volume is held short with
investors betting the stock will go down well then it's going to gather your
interests if you're a institutional investor following this thing let's
think about this for a sec this means that if ten million shares trade a day
and four million are held short then some interesting things might just
happen let's think about this theory first this theory says that the stock [whatever.com stock price appears]
will likely go the other direction of where it's held short ya up you know
like the movie why would this be the case you got lots of people who are
smart shorting the stock betting it's gonna go down betting there's big
problems hmm okay so there's problem here when lots of smart people are
seeing the same thing no the same thing doesn't usually happen let's say you
have a stock at 40 bucks a share with a huge 35% short position on it and that [Stock with share price appears]
short position can be calculated as a percent of the float meaning the shares
that regularly trade every day or of the total shares outstanding why does it
matter well in some stocks where you have a hundred million shares
outstanding 60 million of those shares might be held by the founder and you
know 15 or 20 of his cronies and a couple of board members who are gonna
own it for decades they're never gonna sell so they don't trade in it so not a
hundred million shares trade regularly it's more like only 40 million shares
trade regularly so a thirty five percent short position on that company might
only refer to the float of 40 million shares in which case something like in
twelve thirteen million in change are short on it got it alright so in our [Investors appear]
example here let's say investors probably shorted that stock that's now
at 40 bucks they shorted it at 50 and some at 30 and some at 60 and some at 20
right like it's a volatile stock and they all sold a short thinking was gonna [Investors with different share price appear]
be worth eight bucks at some point so you look at a short position in a stock
and it's likely that not all investors shorted it exactly the same price
certainly not worth trading today at these forty bucks so now the stock does
miss a quarter and it goes down three dollars on the news to 37 well there are
probably a whole lot of investors who did short at 40 and are happy to make
their quick three bucks buy the stock back and close out their short position
with the brokerage they make $3 and move on all right well others who shorted at [Investor scratching head]
20 only to see the stock double like wiping them out like they lose a lot of
money when the stock goes up 20 bucks when they were at 20 betting it was
going to 8 or whatever well they want to stop the pain so they just buy out their
short position at 37 here taking $17 of pain in the process and moving on all
right and that was pain like a lot of pain those seventeen dollars of loss [Man screams in pain]
like 50 shades of a broker yeah where the safe word is neutralized and then
there are still others who shorted the stock heroically at 60 bucks a share who
are now happy to get off the million dollar ride and convert meaning they'll [Rollercoaster appears]
buy back their stock at 37 dollars here in making 23 bucks a share in profit and
move on well what does all this mean all this conversion of a short position to
ending the short or unwinding it buying the stock long handing all the shares
back to the brokerage and having no exposure to this stock anymore what does
all this mean well with a ton of quote fuel unquote left in the ownership [Fuel gauge appears]
position and likely with days and days of short position out there like days
and days of trading like even if you unwound 5% of the total flowed every day [Calendar pages flick over]
would take you days and days to fully unwind a short position until there was
zero percent short on that stock eventually you have to convert those
short positions to long positions or at least by long positions against them to
neutralize your exposure to the short so the stock essentially has time on its
side as odd as that sounds and brokerages love doing stuff like this
because they charge the people who short the stock a fortune to rent the stock to
short it's called the borrow and it's a nice profit
Center for brokerages who trade in all that got it okay so times on their side [Clock ticking forward]
because whichever way the stock moves it will make the load of investors nervous
and they will likely start buying the shares long to close out their short
positions and remember that when investors short a stock they have to pay
this borrow on the interest as long as they're short that stock so even if they
buy them and they're still short they have to then give both the long and the [Investors cash transfers to brokerage]
short back to the brokerage to neutralize the position there is no good
strategy to short and hold the stock for ten years unless you were at GE a decade
ago maybe but even then the borrow would probably kill you all right moving on
then there's always the specter of Google coming along and paying $60 a [Google HQ appear]
share for our stock that wheedle down to 37 dollars a share and then you're
really wiped out because if you shorted it at 20 and you never covered and
Google pay sixty for it you've lost $40 a share on your short position and
that's a problem so yeah that's the short interest Theory when there's lots
of shares short on a stock it actually tends to go the other way I mean it goes
up not down because there's so many short people nervous Nellie's out there [Girl biting her nails]
who know they have to cover their short at some point and there's also a short
attention span theory which is the theory that you stop watching this video [Woman whistling and walks away from computer]
45 seconds ago didn't you yeah all right we knew it
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