Short Call Strategy
The selling call option strategy is also called selling uncovered call options. If an investor sells call options without holding the price of the underlying asset, then this strategy is selling uncovered call options. This strategy has limited potential profits but unlimited losses.
The strategy of selling a call option is different from the strategy of shorting the underlying asset. Although both strategies are high risk, the potential return of the strategy of shorting the underlying asset is much higher, while the potential return of the strategy of selling the call option is Performance will be better when the price of the underlying asset is relatively stable. That is to say, when the short-selling underlying asset strategy suffers a loss, the call option selling strategy may be profitable. Additionally, investors in a short-selling underlying asset strategy are required to pay dividends on the underlying asset, whereas investors in a call-selling strategy do not.
1.1 Strategy Overview
Trend: Bearish
Volatility: N/A
Asset Leg: Selling Call Options
Maximum risk: no upper limit
Maximum profit: There is an upper limit
Strategy Type: Income Strategy
1.2 Investment required
The margin required by the call option selling strategy is 20% of the underlying asset price plus the premium of the call option minus the portion of the underlying asset price below the exercise price, that is, the degree of out-of-the-money value. Positions in a short call option strategy need to be marked to market on a daily basis, which means that the collateral requirements for the strategy's positions need to be calculated daily just like the short selling underlying asset strategy.
1.3 Strategy philosophy
When considering a call option selling strategy, investors need to consider whether they can tolerate the risk associated with this strategy. Because the strategy of selling call options means that if the price of the underlying asset rises significantly, the risk of the strategy is unlimited.
Generally speaking, investors who sell call options should let the options expire worthless rather than move them unless the price of the underlying asset moves significantly upward, so the call option strategy generally chooses out-of-the-money options. In general, investors who sell call options must be mentally prepared, have sufficient funds, be willing to accept risks, and be able to monitor strategic positions on a daily basis. Investors should sell options with extremely high implied volatility and cover the position when the option becomes in-the-money.
1.4 Strategy risks and benefits
Investors adjust their risk and return by selling call options strategies. Selling out-of-the-money options, especially deep out-of-the-money options, can result in a small profit with a higher probability, while selling real-in-the-money options may result in greater potential profits and also bear greater risks.
The strategy of selling deep out-of-the-money options may seem attractive because unless the price of the underlying asset rises significantly before expiration, investors can make a profit, but the danger with this strategy is that one or two losses are very likely. Or lose profits multiple times. The other end is selling deep in-the-money options. Because deep in-the-money options don’t have much time value, the seller doesn’t have much room for upside. If the price of the underlying asset keeps rising, then the seller of deep in-the-money options If the price of the underlying asset falls, investors who sell deep in-the-money options will make greater profits than investors who sell deep out-of-the-money options.
1.5 Follow-up actions
① Stop loss: Since the call option selling strategy has great upside risk, investors need to monitor their investment positions at all times. The simplest way to limit losses is to set a stop loss price, for example, investors sell out-of-the-money options. , now that the price of the underlying asset has risen to the exercise price, then this is a good exit opportunity. Some traders like to set the stop loss price as the break-even point of the strategy. The breakeven point for a call strategy is well understood and is equal to the strike price of the call sold plus the premium received.
② Close the position and take away the profit: When the strategy has no more opportunities to make money, close the position and take away the profit. Investors can calculate the remaining income of continuing to hold the strategy. If the income is too small, then they should buy back the call options and then look for the rest of the trading opportunities.
③Income transfer: When the price of the underlying asset reaches another exercise price, investors close their existing positions and at the same time sell more call options at another exercise price, either in the same month or in a different month. , so that the premium can be received by selling more call options with another strike price to cover the expenses of closing the old position. Investors can do this repeatedly until the price of the underlying asset falls, rendering the position worthless at expiry.
In most cases, the call option selling strategy is used as a deep out-of-the-money option strategy, but this strategy is not a very smart strategy, because one loss can wipe out multiple gains. In order to avoid upside risks , investors should buy back the call option when the price of the underlying asset rises to the break-even point.
1.6 Python practice
Underlying asset: ChinaAMC SSE 50 ETF
Options: 50ETF Call Options
Backtesting time: June 1, 2022 - July 20, 2022
Idea: Sell call options, swap positions at the end of the month, and calculate the net value of the options contract strategy for the first to third levels of virtual value and the first to third level of real value respectively.
Part of the code:
class Short_call(object):
def __init__(self,st,k):
self.st=st
self.k=k
def option_value(self):
return -np.maximum(self.st-self.k,0)
def plot_return(self):
value=self.option_value()
plt.figure(figsize=(10,4))
plt.plot(st,value,label='long_call')
plt.xlabel('st')
plt.ylabel('return')
plt.legend(loc='upper left')
plt.show()
st=np.arange(50,100,5)
k=70
Short_call(st,k).plot_return()Short_call_return
Strategy net value trend:
