Strategy: Basic strategy, Income strategy Opening the position Sell a Call option with a strike price higher than the current market price of the underlying security.
Write a Call option with a strike price close to the current price of the underlying security ATM Call. The option should be sold only if the writer thinks that the share price will rather fall than increase. Exit: The writer hopes that the price of the underlying security will decrease or stagnate, so the options will expire worthless and he can keep the premium.
If the share price increases above the Stop Loss level, the writer can leave the position by buying back the sold option.
Basic characteristics Maximum loss: Increasing as the market rises.
It might even be unlimited. Maximum profit: Limited. The profit cannot be bigger than the premium received. Time decay: Time decay has a positive effect on the Short Call.
The closer the option to expiration the more it increases its value. This process accelerates over time, which may be further strengthened by a decrease in the underlying securities volatility.