Selling/Writing a Call Option
Selling/Writing a Call Option​
When you sell (or write) a call option, you agree to sell an asset at a predetermined strike price if the buyer exercises the option. In exchange, you receive a premium upfront. Unlike a call option buyer, the seller has unlimited risk but limited profit, as they only keep the premium.
Example​
Let’s say you write a Bajaj Auto 2050 call option and receive a premium of ₹6.35. If Bajaj Auto’s stock price remains below ₹2,050 at expiry, you keep the premium as your profit. However, if the stock price rises above ₹2,050, your potential losses are unlimited.
Here’s a simple example to illustrate the seller’s P&L:
| Price Movement | Premium Received | Loss/Profit |
|---|---|---|
| ₹2,030 | ₹6.35 | +₹6.35 (Profit) |
| ₹2,060 | ₹6.35 | -₹3.65 (Loss) |
| ₹2,080 | ₹6.35 | -₹23.65 (Loss) |
Risk and Reward​
- Profit: The maximum profit for a call option seller is the premium received. As long as the stock remains at or below the strike price, the seller profits.
- Loss: If the stock price exceeds the strike price, the seller incurs a loss. The higher the price moves above the strike, the greater the loss.
Margin Requirements​
Since the risk for the seller is theoretically unlimited, margins are required. The margin acts as a buffer to ensure the seller can meet potential losses. AlgoTest users can calculate the required margin using the Margin Calculator in the Strategy Builder.
Conclusion​
Selling a call option is ideal for traders who expect the stock price to remain flat or decrease. However, due to the unlimited risk, it’s crucial to use hedging strategies or tools like AlgoTest’s Simulator to evaluate potential outcomes.