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Old 28th November 2010, 08:42 PM
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Default Maximum Loss of a Short Call Option



How does the maximum loss of a short call option equals to the premium amount paid?

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Old 28th November 2010, 11:43 PM
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Those who write naked call options have unlimited risk.

Suppose I write a $80 call for a stock and get a premium of $5 for it.

If the stock goes to $100 and the option is exercised, my net loss will be ($100-$80+$5) = $15.

If the stock goes to $150 and the option is exercised, my net loss will be $65.

If the stock goes to $200 and the option is exercised, my net loss will be $115.

And so on.

It is the call buyer, whose risk is limited to the premium that he pays for the call.
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