In trading, there are always buyers and sellers, and their expectations are opposite to each other. For trading call option, the buyer expects the price of the underlying asset to rise, while the seller expects it not to rise. This includes scenarios such as a slight drop, a significant drop, or a flat market.
1. Scenario:
Investors can sell call options to earn premium income when they expect the price of the underlying asset not to rise significantly (moderately bearish outlook).
2. Description:
Selling call options means that the seller receives the premium paid by the buyer. The seller sells a call option contract to the buyer at a certain price, with the goal of hoping that the price of the underlying asset will not rise by the expiration of the option. If the buyer chooses not to exercise the option, the seller retains the premium income.
However, if the price of the underlying asset rises and the buyer chooses to exercise the option, the seller of the call option will have to pay the difference between the exercise price and the price of the underlying asset, resulting in a loss. Furthermore, since the seller of the call option has an obligation to fulfill the contract, the exchange will require the seller to post margin as a form of collateral.
Unlike futures, where both buyers and sellers must provide margin, only option sellers have an obligation, so they are required to provide margin.
3. Example:
Assume that the current price of BTC is $25,000, and we expect the price not to rise significantly. Therefore, we sold a near-month call option for BTC with an exercise price of $26,000 and received a premium of $1,000.
At expiration, if the price of BTC rises to $28,000 the call option will result in a loss of $1,000 as shown in the following calculation:
1,000 (premium received) – 28,000 (expiration price) + 26,000 (exercise price) = -1,000
Profit/Loss table:
| Expiration price | Exercise price | Premium | Profit/Loss | Option type |
| 28,000 | 26,000 | 1,000 | -1,000 | Out-of-the-money |
| 27,000 | 26,000 | 1,000 | 0 | Out-of-the-money |
| 26,000 | 26,000 | 1,000 | 1,000 | At-the-money |
| 25,000 | 26,000 | 1,000 | 1,000 | In-the-money |
The profit/loss table shows the profit/loss on the expiration date. In trading, some investors may choose to close their positions early. In this case, the profit/loss for selling a call option is simply the difference between the premium received at opening and the premium paid at closing.
It should be noted that when the expiration price is below the exercise price, the profit from selling call options is fixed. The maximum profit for the option seller is the premium, which is why we often say that option sellers have “limited profits and unlimited risks.”
Since the risks are unlimited, why would investors choose to be option sellers? We can think of option sellers like insurance companies. They cover the payout amount of rare events by collecting stable insurance premiums. Option sellers are also the side with a high probability of winning. They choose to sell the corresponding call option when they judge that the probability of exercising the call option is very small. In addition, as the time value of options continues to decay, the win rate of option sellers will be higher.
4. Risks of Selling Call Options:
- Margin Risk
Margin is required as collateral for the seller to ensure that they can fulfill the option contract. When selling an option, the seller collects a premium but also needs to provide margin as collateral. If there is a significant price fluctuation in the underlying asset or if the price moves in the opposite direction to what was expected, the seller may be required to increase their margin. If the seller is unable to provide the additional margin, their position may be forcibly liquidated.
- Risk of Large Losses
Large price fluctuations in the underlying asset or movements in the opposite direction of what was expected can lead to substantial losses for the seller.
Options traders, can choose market price or limit price to close positions, but there may be slippage due to insufficient market liquidity, which will affect the income of options transactions.
- Naked Selling Risk
Naked selling of options can be very risky for novice investors. It is recommended to learn more about option combination strategies and hedging short positions.
5. Notes:
- Stop-loss First
As the profit of an option seller is limited while their losses are unlimited, it is essential for novice investors to be aware of the risks and use stop-loss as the most effective risk control method, which is also a prerequisite for profits. Specific stop-loss methods can include setting fixed prices, psychological prices, capital ratios, and technical indicators.
- Start with a small position
Position control is a necessary lesson for option sellers because selling an option requires providing sufficient collateral. Once the position is too large, even if the direction is judged correctly, a lack of collateral due to short-term market volatility may lead to forced liquidation.
- Follow the Trend
As the risk for option sellers is theoretically unlimited without effective hedging, it is crucial for option sellers to judge the market direction accurately. More information about protection and hedging strategies for option sellers can be learned through practical options strategies.
- Value Volatility
Successful option sellers are always able to capture overpriced options. The core factor in option pricing is implied volatility. After opening a position, option sellers should pay close attention to changes in implied volatility.
- Start with Selling OTM Options
Novice investors can consider starting with selling out-of-the-money options. Compared to at-the-money or in-the-money options, the likelihood of out-of-the-money options being exercised is lower, and this low probability is an advantage for the option seller.
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