How We Sell Call? | What are the Benefits of Sell call ?
Sell Call
Sell Call (29 Hedging strategies By Vinay Bhandari)
• Selling or “Going Short” on a Call is a strategy that must be devised when the investor is not so bullish on the market. On selling a Call, the investor earns a Premium (from the buyer of the Call).
• This position offers limited profit potential and the possibility of large losses on big advances in underlying prices. Although easy to execute it is a risky strategy since the seller of the Call is exposed to unlimited risk.
• Investor View: Very Bearish on the Stock / Index.
• Risk: Unlimited.
• Reward: Limited to the premium received. Breakeven: Strike Price + premium received.
• Illustration
• E.g.
Nifty is currently trading @ 15500. The investor is expecting the markets to fall drastically from these levels. So by selling a Call Option of Nifty having Strike 15500 @ premium 50, the investor can get an inflow of
• 50 and benefit if Nifty stays below 15550.
|
Strategy |
Sock / Index |
Type |
Strike |
Premium |
|
Sell Call |
Nifty ( Lot 75 ) |
Sell Call |
15500 |
50 |
The Playoff Schedule for the above is below.
• Payoff Schedule
|
Nifty @ Expiry |
Net Payoff |
|
15200 |
3750 |
|
15300 |
3750 |
|
15400 |
3750 |
|
15500 |
3750 |
|
15550 |
0 |
|
15600 |
-3750 |
|
15700 |
-11250 |
|
15800 |
-18750 |
|
15900 |
-26250 |
Payoff chart
In the above chart, the breakeven happens the moment Nifty crosses 15550 and risk is unlimited. It is important to note that irrespective of how much the market falls, the reward is limited to 3750 only.