What is Sell Call ?(29 Hedging Strategies By Vinay Bhandari)


Sell Call (29 Hedging strategies By Vinay Bhandari)

* Selling or “Going Short” on a Call is a strategy that must be devised when the investor is not so bullish on the market. On selling a Call, the investor earns a Premium (from the buyer of the Call).

* This position offers limited profit potential and the possibility of large losses on big advances in underlying prices. Although easy to execute it is a risky strategy since the seller of the Call is exposed to unlimited risk.

* Investor View: Very Bearish on the Stock / Index.

* Reward: Limited to the premium received. Breakeven: Strike Price + premium received.

* Illustration

Nifty is currently trading @ 15500. Investor is expecting the markets to fall down drastically from these levels. So by selling a Call Option of Nifty having Strike 15500 @ premium 50, the investor can get an inflow of

* 50 and benefit if Nifty stays below 15550.

The Payoff Schedule for the above is below.

* Payoff Schedule

In the above chart, the breakeven happens the moment Nifty crosses 15550 and risk is unlimited .It is important to note that irrespective of how much the market falls, the reward is limited to 3750 only.

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