Short Call Option: What It Is and How to Create a Short Call Trade

One of the four basic option strategies is a Short Call trade. A short call position is initiated when a trader anticipates that the price of the underlying asset will decline. It is a bearish strategy designed to profit from falling prices. However, it carries the risk of unlimited loss if the price moves against the trade. 

Definition 

A short call position is created by selling a call option when the trader expects the price of the underlying asset to decline. 
The chart below shows the payoff diagram of a short call option. 

As seen in the diagram, this strategy has limited profit potential and unlimited downside risk. 

Suppose a trader sells a 17,300 Call option at ₹314.75. 
Given that Nifty’s lot size is 50, the premium received is ₹15,737.5 (₹314.75 × 50). 

• Maximum Profit = ₹15,737.5 

• Theoretical Maximum Loss = Unlimited 

• Margin Requirement = ₹82,419 

• Breakeven = 17,300 + 314.75 = ₹17,614.75 

When to create a Short Call trade 

A short call trade is placed when the trader expects the underlying to fall or remain sideways. Even if there’s no drop, the trade can still be profitable due to Theta decay over time. 
Profits are realized when the asset stays below the strike price. 

The success rate of short call trades is generally high when carried over multiple days. 
If the market declines slowly, the trade benefits from both direction (Delta) and time decay (Theta). 
If the market stays flat or below breakeven, the trade still benefits from Theta decay alone. 

Short Call trades are ideal when anticipating a gradual downward move. In case of a sharp fall, Put buying or other debit strategies may be more effective. 

Traders also use Short Calls in intraday setups or as part of multi-leg strategies. 
A popular use case is the Covered Call, where a trader holds the stock and sells an OTM Call to earn premium income in sideways or falling markets. 

This trade works best when Implied Volatility Percentile (IVP) or Implied Volatility Rank (IVR) is high. 
Due to the risk of unlimited loss, it is best suited for experienced traders. 

Key Takeaways 
There are two basic ways to benefit from a falling market: 

1. Buy a Put option 

2. Sell a Call option (Short Call strategy) 

• The seller of a call gives the buyer the right to buy the asset at the strike price before expiry 

• In return, the seller receives a premium 

• The trader can choose a strike price that increases the chance of the option expiring worthless 

• If the option is exercised, the seller must deliver the underlying asset 

• Short call trades profit when the price remains below the strike 

• Maximum profit is fixed (premium earned), while loss potential is unlimited 

Short Calls versus Long Put 

Both strategies aim to profit from a price drop in the underlying. 

• A Long Put offers unlimited gain potential, while a Short Call caps profits at the premium collected 

• If the price rises, a Long Put’s loss is limited to the premium paid, whereas a Short Call may face unlimited losses 

• If the price stays flat, a Long Put loses due to time decay, while a Short Call profits 

Factors to consider while taking a Short Call trade 

Impact of underlying price change 

Short call trades generally benefit when the asset price does not rise. 
However, price movement in the option is influenced by Delta. For instance, if an option has a Delta of 0.20, a 100-point move in the underlying changes the option price by 20 points. 

Based on the expected movement, traders should pick the strike that offers the best balance of return and risk. 

Impact of volatility 

Sellers prefer high-volatility environments as premiums are richer. 
Short Calls are best placed when IVR or IVP is high, as premiums are elevated and can later erode as volatility falls, adding to profit potential. 

Impact of time 

Time works in favor of the seller. As expiry nears, the premium reduces due to Theta decay, which helps the seller make a profit even if the market doesn’t move significantly. 

Impact of stock price change 

Option prices don’t follow a 1:1 movement with the underlying. The change depends on Delta. 

• ATM calls typically have Delta ≈ 0.50 → ₹1 movement in stock = ₹0.50 in option 

• ITM calls → Delta > 0.50 (up to 1.0) 

• OTM calls → Delta < 0.50 (but > 0) 

Impact of change in volatility 

Volatility impacts pricing. As volatility rises, option prices rise hurting Short Calls. 
As volatility falls, option prices fall helping Short Calls. 

Impact of time 

The time value of an option erodes as expiration approaches. This is known as time decay or Theta erosion, and it plays a key role in the profitability of a short call trade. 

Conclusion 

The Short Call strategy offers limited rewards but comes with the risk of unlimited loss. 
Despite this, the strategy has a high success probability, especially in sideways or bearish markets. 
It is often used as a core building block in more advanced options structures. 

Traders using m.Stock can consider Short Calls to generate income or hedge exposure—provided they understand and manage the associated risk.