Short call option wikipedia
Why do you recommend this news source? A call option is a financial instrument that gives the buyer the right, but not an obligation, to buy a set quantity of a security at a set strike price at some time on or before expiration. In this sense, a call option is very similar to a warrant. The decision of the best time to exercise the call depends on whether it is an American option or European option. If and when the buyer decides to exercise the option, the counterparty who sold, or wrote the call must sell to the buyer the security at the agreed-upon strike price, even if the security's market price has risen above the strike price.
In other words, when you buy a call option, you are buying the right to buy a stock at the strike price, regardless of the stock price in the future before the expiration date. Since the payoff of purchased call options increases as the stock price rises, buying call options is considered bullish. To compensate you for that risk taken, the buyer pays you a premium, also known as the price of the call. The seller of the call is said to have shorted the call option , and keeps the premium the amount the buyer pays to buy the option whether or not the buyer ever exercises the option.
If this occurs, the option expires worthless and the option seller keeps the premium as profit. Since the payoff for sold, or written call options increases as the stock price falls, selling call options is considered bearish. From the makers of. Unable to complete your request. Please refresh your browser. See more recent news. Call Options For Dividend Investors.
Since a naked call seller does not have the stock in case the option buyer decides to exercise the option, the seller has to buy stock at the open market in order to deliver it at the strike price. Since the share price has no limit to how far it can rise, the naked call seller is exposed to unlimited risk. Speculators who have an appetite for risk might buy a call option when they believe the price of the stock will go up and they do not have the cash available to pay for the stock at its current price.
A disadvantage of the call option is that it eventually expires. Speculators may sell a "naked call" option if they believe the price of the stock will decline or be stagnant. The risk of selling the call option is that risk is unlimited if the price of the stock goes up.
A doesn't buy the stock, therefore A's investment is considered naked. At expiration of the option, consider 4 different scenarios where the share price drops, stays the same, rises moderately or surges. From Wikipedia, the free encyclopedia.
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