What is a Short Call Option?

Long Call, Short Call Option, Long Put Option, Short Put…What does it all mean?

There is a lot of terminology on Wall Street especially for Stock Options. It can be confusing for those new to the stock market especially since so many terms mean the same thing! For example, purchasing and holding a stock (what most people do) is also known as ‘Long a Stock’. In stock options there are similar terms like Long Call Option, Short Call Option, Long Put, and Short Put. These can all be said in different ways but the underlying meaning is the same. Let’s define what each of these mean:

Stock Options Definitions

Call Options

Long Call Option

  • Long Call: This means you are Buying a Call option contract (click here to learn about Options.) Therefore, if the price of the stock goes up you have unlimited profit. Alternatively, if it goes down you have a limited loss (the premium of the option contract you paid.) Use the Long Call if you think the underlying stock price is going to rise. Be cautious though as this is significantly more risky than just buying into the stock itself.

Short Call Option

  • Short Call: This means you are Selling a Call option contract. In this case, if the price of the stock goes up you have unlimited loss. If the price goes down you have limited profit (the premium of the option contract you received.) Use this strategy if you think the underlying stock price will stay the same, go down, or move up slightly. This is generally a safe play and can be used to generate income.

Put Options

Long Put Option

  • Long Put: This means you are Buying a Put option contract. Therefore, if the price of the stock goes down you have substantial profit. The profit isn’t unlimited because the stock price can go down to a lowest value of $0. If the stock price goes up you have a limited loss (the premium of the option contract you paid.) This is a great strategy if you think the underlying stock price is going to fall. Be cautious: it is high risk. It can also be used if you want hedge any current stocks you own (buying insurance for these stocks.)

Short Put Option

  • Short Put: This means you are Selling a Put option contract. In this case, if the price of the stock goes down you have substantial loss. Since the stock price can go down to a lowest value of $0 the loss is not unlimited. If the stock price goes up you have limited profit (the premium of the option contract you received.) Use this strategy if you think the underlying stock price will stay the same, go up, or go down slightly. This is generally a safe play and can be used to generate income.

So now you know what a Short Call Option is, what’s next?

Stock options are a very important tool to every successful trader and investor. It is crucial to understand the terminology and how to use them to your advantage. At YP Investors we are here to help grow your wealth with our stock analysis tools and point and figure charts. If you are aren’t a member you can join today with a Free Trial Membership!

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