call - the type of option that gives the holder the right to buy a specific amount of underlying collateral at a certain price for a specified period of time, the act of exercising a call option (The Securities Institute of America, Inc., p. 221).
You can distinguish two options:
- long call - an option contract that gives its holder the right but not the obligation to buy a specific asset at the strike price on or before the expiration date (S. Jovanovic, p. 136);
- short call (covered - if an investor owns the underlying that would need to be delivered in the event of an assignment, and naked - if an investor doesn't own the underlying) (G. Pruitt, J. Hill, p. 232).
short call - an option contract that imposes the obligation to its writer to sell the specific asset at the strike price on or before the expiration date.
By selling a short call, the option writer grants the option buyer the right to purchase the underlying at the exercise price. The writer receives a bonus and acquires the obligation to sell the underlying in the case of an assignment (S. Jovanovic, p. 142).
It's one of the strategies from which you can build more complex patterns. It's selling the right to purchase the underlying instrument at a fixed price, the seller has a contract to provide the underlying instrument at an agreed price (P. Moles, N. Terry, p. 395).
Synthetic short call
synthetic short call - an option strategy obtained by hedging a short underlying with short put (S. Jovanovic, p. 179)
To create a synthetic short call, reverse the synthetic long call position by shorting shares and sales. Both the synthetic short call and short call have the potential for unlimited risk on the upside. You can replicate them by shorting the stock and selling a put at the same strike price and expiration date. The short stock portion of the synthetic short call requires more margin than the short call alone. The only benefit that a synthetic short call has in comparison with the other is that you can reinvest the proceeds of short selling shares.
Both are extremely risky positions and are not recommended unless combined with other positions (G. Jabbour, P. Budwick, p. 45, 46).
- Duarte J. (2015), Trading Options For Dummies, John Wiley & Sons
- Ianieri R. (2009), Options Theory and Trading: A Step-by-Step Guide to Control Risk and Generate Profits, John Wiley & Sons
- Jabbour G., Budwick P. (2004), The Option Trader Handbook: Strategies and Trade Adjustments, John Wiley & Sons
- Jovanovic S. (2014), Hedging Commodities: A practical guide to hedging strategies with futures and options, Harriman House Limited
- Moles P., Terry N. (1997), The Handbook of International Financial Terms, OUP Oxford
- Pruitt G., Hill J. (2012), Building Winning Trading Systems with Tradestation, John Wiley & Sons
- The Securities Institute of America, Inc. (2014), Wiley Series 4 Exam Review 2015 + Test Bank: The Registered Options Principal Qualification Examination, John Wiley & Sons
Author: Katarzyna Sieczkowska