11. Short Call Spread

  • Vertical credit spread
  • Short an OTM call at strike price, long an OTM call at a higher strike price
  • Notice that this is the reverse of a long call spread
  • This is a bearish position
  • It has to be at same expiration and same number of contracts
  • It is like selling a call but protecting yourself at the upside

Advantages

  • Clear max profit and clear max loss
  • Positive time decay

Analysis

  • You short an OTM call at strike price KS at a premium of CS
  • You long an OTM call at strike price KL at a premium of CL
  • The max profit is the premium your received for the short minus the premium you paid for the long (The premium you receive for the short will be greater than the long because its more ITM)
  • Max profit CS - CL
  • Max Loss is the strike price spread minus the difference in premiums
  • Notice that the max profit and max loss are reversed to the long spreads
  • Notice how the long position is more OTM than the short position, the opposite to a long call spread

short_call_spread.png

At expiration, if it expires

  • OTM: Worthless (max profit)
  • ATM: Assigned on the short call
  • ITM: Exercised and assigned (max loss)

Example

  • 2100/2105 Short call spread initiated for 2 (You get $2 credit)
  • Max profit is 50 - 48 the premium spread, 2 (times 100)
  • Max loss 2 - strike price spread 2100 - 2105 = -3 (times 100)
  • Breakeven is 2102

short_call_spread2.png

Capital required

  • Short 100 shares - $200,000
  • Sell 1 2100 call - $50,000
  • Buy 2100/2105 call spread - $300
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Table Of Contents
11. Short Call Spread
Advantages
Analysis
Example