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Short Call Option Calculator

Short Call P/L Formula:

\[ P/L = Premium - \max(0, S - K) \]

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1. What is a Short Call Option?

A short call is an options strategy where the seller (writer) receives a premium for giving the buyer the right to purchase the underlying asset at a specified strike price before expiration. The seller profits if the underlying price remains below the strike price.

2. How Does the Calculator Work?

The calculator uses the short call P/L formula:

\[ P/L = Premium - \max(0, S - K) \]

Where:

Explanation: The maximum profit is limited to the premium received. The potential loss is unlimited as the underlying price rises above the strike.

3. Risk/Reward Profile

Details: Short calls have limited upside (premium received) and theoretically unlimited downside risk. They require margin and are typically used by experienced traders.

4. Using the Calculator

Tips: Enter the premium received, current underlying price, and strike price. All values must be positive numbers in USD.

5. Frequently Asked Questions (FAQ)

Q1: When would you sell a call option?
A: When you believe the underlying asset will stay flat or decline, or when you want to generate income on a position you own (covered call).

Q2: What's the breakeven point?
A: Breakeven = Strike Price + Premium Received. Above this price, losses begin.

Q3: What are the margin requirements?
A: For naked calls, margin is typically 20% of underlying value + premium - out-of-money amount. Covered calls require owning the underlying.

Q4: How does time decay affect short calls?
A: Time decay (theta) works in the seller's favor as options lose time value approaching expiration.

Q5: When should you close a short call position?
A: Consider closing for partial profit when most time value has decayed, or to limit losses if the position moves against you.

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