Contents

Short CALL (or) Naked CALL

Short call or Naked Call is a Bearish to Neutral Option Strategy. You use this strategy when you expect the stock price to fall or stay where it is. This means, you do not expect an immediate increase in the stock price. You want the Call that you sold to expire worthless.

Trade Set-Up

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Short Call (or) Naked Call

Sell a Call Option

short call-Finvezto

Illustration Using Nifty Options

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Short Call-Finvezto
Snapshot from Upstox.com Strategy Builder

In the pay-off graph above, the price of the underlying asset (Nifty) is plotted in the X-Axis and the profit/loss is plotted in the Y-Axis.

The black line with dots indicates the profit or loss at different prices of the underlying asset.

The region shaded in green indicates profitable zone and the region shaded in grey indicates loss zone.

A positive number (75 = Buy 1 lot) in the Quantity column indicates a Buy position and a negative number (-75 = Sell 1 lot) indicates a Sell position.

Entry Checklist

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Market Outlook
  • Bearish to Neutral Outlook
  • Do not enter when market is trending upwards
  • Price should be falling from a resistance zone
  • Volatility
  • Implied Volatility or India VIX should be high and falling when you sell the Call Option
  • Open Interest
  • Heavy Call Buildup around resistance zone
  • CALLs sold should be equal to or more than the PUTs sold
  • Strike Price
  • Sell Out-of-the-money (OTM) Call options of the current month or current week
  • Choose shorter timeframes as time decay will be in favour of sellers
  • Positional or Intraday?
  • Sell current month options if you are planning to hold overnight
  • Sell OTM call options intraday depending on the OI build up for the day
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is unlimited. Hence, position needs to be managed with stop loss
  • Reward [Profit]
  • Maximum profit is limited to the premium received.
  • If you sell an OTM CALL option with delta less than 0.2, then the probability of success is more than 80%
  • You will receive the reward more often than not, although it is limited
  • Break Even Point
  • Strike Price + Premium Received
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay will erode premium and reduce the value of the Call option
  • Time decay is helpful for this position
  • Volatility impact [Vega]
  • If volatility reduces after you sell the CALLs, then you will benefit
  • If volatility increases and price falls, you will still benefit
  • If volatility and price, both fall, then the option premium will decay quickly.
  • Price Impact [Delta]
  • As long as delta is less than 0.5, you can hold on to the position.
  • If delta goes above 0.5, you will incur significant losses
  • Trade Management & Exit

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    Rolling & Adjustments
  • Rolling not applicable.
  • Stop Loss
  • Set a Stop Loss when you enter the position
  • Stop Loss should be set in such a way that Risk is limited to 1-2% of your entire capital
  • Exit when your stop loss is hit
  • Exit Conditions
  • Exit when price of the CALL option hits the Stop Loss
  • Exit when the delta becomes greater than 0.5
  • Exit when price breaks through the resistance zone
  • A Word of Caution

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    Alert:

    • You need to be good at spotting true resistance zones to sell CALLs effectively. Learn how to spot them.
    • If you are a beginner, start by selling deep Out-of-the-money (OTM) call options far away from the resistance zone identified, even though the profit is limited. Get closer to the resistance zone, once you gain expertise.
    • Sell CALL options only on INDICES like Nifty & BankNifty. Indices are less volatile. Selling Naked calls on individual stocks is riskier as they are more volatile than indices.