What is a short call?

 

Video Transcription

Hi. Casey Jensen here, again, at OptionsANIMAL. Are you maybe new to options, and you're not sure exactly how a call option works, in this case, maybe a short call? What is a short call? Well, "short" always means that we're selling, so we're selling a call option. What does that mean? How does that work? Remember, any time you sell an option, you take on an obligation.

So in this case, let's look at a quick example. If you sell a September call option, this has 90 days to expire. SC, short for short call. At $105 is our strike price. So what are we saying? What's our obligation? Well, our obligation is to, if the stock's at 100, our obligation would be to sell the stock at 105.

Now, how would that work? Well, if the stock goes up, let's say, to 120. You have to look at it this way, there are always two parties involved when it comes to options.

So, if you're selling, then someone else is buying. Some other individual out in the market. So they have a right to purchase the stock at 105. If the stock's at 120, are they going to want to buy it at 105? The answer's yes, right? They're going to want to buy it.

Now, they may not always choose to exercise that right, but that's the obligation we take on when we sell a call, a short call. You're selling a call. You're taking on an obligation to sell the stock, in this case, at 105. And you have that obligation for 90 days.