Description
The purchase
of a Call option
allows the short
seller to establish
a bearish position
with limited risk.
Because of the short
stock, it is not
a popular strategy.
When to use
Often times the
position is established
due to an adjustment
to a long Call position.
By selling XYZ short,
the investor turns
a bullish position
(long Call) into
a bearish position
(synthetic long
Put).
Risk/Reward
Characteristics
Profit potential
is limited only
by the fact that
XYZ cannot decline
below zero. Losses
are limited as long
as the Call option
is owned.
Break-even
Point: Selling
price of XYZ stock
- premium paid for
Call.
Time Decay:
Negative. Over time,
the time value portion
of the Call erodes
(i.e., decays).
At expiration, the
Call's value will
equal its intrinsic
value.
Volatility:
Changes in the Call
option's implied
volatility has an
effect on the "time
value" portion of
the option's premium.
If volatility increases,
the Call option
will increase in
price. If volatility
decreases, it will
decrease in price.
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