Short Out-of-the-Money Call

A short out-of-the-money call is an options trade in which the seller conveys the right to the buyer to buy futures at a specific price at any time before expiration.

In exchange for the premium received, the seller, or writer, of the call options contract is obligated to sell the underlying futures contract at the strike price at any time prior to expiration if a holder of the options contract chooses to exercise it.

This position maximizes profits if the underlying futures prices stay at the strike price or lower until expiration. Profits are limited to the premium received while risk is unlimited on the upside. Selling a naked out-of-the-money call is risky; it is usually done in connection with another, offsetting transaction. Declining volatility is favorable to this position as is the passage of time.

Position Premium Dollar Premium Delta Sell one $22 crude oil call $0.50 $500 -.29 Maximum risk Unlimited on the upside Maximum profit $0.50 per barrel $500 per contract Break-even futures price $22.50 Position Premium Dollar Premium Delta Sell one $270 gold call $3.00 $300 -.30 Maximum risk Unlimited on the upside Maximum profit $3.00 per oz. $300 per contract Break-even futures price $273