A buyer's risks are limited to the premium cost; depending on how many points a stock moves up, a call seller's losses can be much higher.
When you take a short position in a call, the decision to exercise belongs to the buyer. You need to be able and willing to deliver 100 shares in the event that the call is exercised, no matter how high current market value has gone. If you do not already own 100 shares, you will be required upon exercise to buy 100 shares at current market value and deliver them at the striking price of the call. The difference in these prices could be significant.
Example: Unacceptable Risks: You sell a call for 5 with a striking price of 45 and expiration month of April. At the time, the underlying stock has a market value of $44 per share. You do not own 100 shares of the underlying stock. The day after your order is placed, your brokerage firm deposits $500 into your account (less fees). However, before expiration, the underlying stock's market price soars to $71 per share and your call is exercised. You will lose $2,100the current market value of 100 shares, $7,100; less the striking price value, $4,500; less the $500 premium you received at the time you sold the call:
Current market value, 100 shares $7,100
Less striking price -4,500
Less call premium -500
Net loss2,100
When a call is exercised and you do not own 100 shares of the underlying stock, you are required to deliver those 100 shares at the striking price. This means you have to buy the shares at current market value, no matter how high that price. Because upward price movement, in theory at least, is unlimited, your risk in selling the call is unlimited as well.
Tip: Selling uncovered calls is a high-risk strategy, because in theory, a stock's price could rise indefinitely. Every point rise in the stock above striking price is $100 more out of the call seller's pocket.
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