Call Option

K

Kirtika

New member
Joined
Mar 4, 2014
Messages
0
Reaction score
0
Hi ,
Can someone please tell me what is the maximum loss to an investor who buys and underlying stock and sells a call option on it.The schweser material says S-C ( initial stock value - premium for call) .I thought max loss for a call seller was unlimited.
 
The obligation on a short call option is to deliver the stock, if you do not have the stock you owe cash. In this case you own the stock so your short call is ‘covered’ by the stock position.
 
Ok so the profits and loss are limited because the call seller has to deliver the stock or cash. Got it thanks Galli
 
Kirtika wrote:
Ok so the profits and loss are limited because the call seller has to deliver the stock or cash. Got it thanks Galli
Click to expand...
For this specific case your profits and losses are limited because you own the stock. I think it’s unlikely you can settle with cash in place of delivering the stock.
 
Kritika, your max loss from the option taken in isolation is still unlimited. It does not contradict what you have learnt before. But here your are looking at your cumulated gains or losses for two instruments at the same time, the stock and the option. The gains on the stock are greatly offset by the losses on the option if the stock value increases. Just look at the instruments separately.
 
Yes - good point myriam2222.
1. Short Call option and underlying stock analysed in combination = (S-C)
2. Short call option in isolation will be unlimited max loss
 
You must log in or register to reply here.
Back
Top