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What is Call Writing

Options are derivative tools that give the right to buy or sell an underlying asset at a particular price and on behalf of a specific date. They are binding contracts with defined terms and conditions. 

Call Writing Meaning

Call writing gives a holder the right but not the obligation to purchase the shares at a predetermined price. In writing a call option, a person will sell the call option to the holder and is obliged to sell the shares at a strike price if exercised by the holder. The seller, in return, gets a premium that is paid by the buyer.

The payoff from Writing a Call Option

A call option provides the holder of the option the right to purchase an asset by a certain date at a particular price. Hence, when a call option is written by the seller or the writer, it will give a payoff of either 0 - since the call is not exercised by the holder of the option or the distinction between the strike price and the stock price that is minimum. 

Types of Call Writing in Stock Market

  1. Covered Call Writing

While writing a covered call strategy, the investor writes the call options for which he owns the underlying. It is a famous strategy in writing options. The strategy is adopted by the investor if they feel that the stock is about to go down or to be constant in the near term or short term but want to hold the shares in the portfolio.

As the price falls, they end up with an earning that is - premium. On the other hand - if the stock price rises, they would sell the underlying to the buyer of call options. In this way, the writer limits the loss with the difference between the strike price at which the underlying is sold and the premium earned by shorting or selling the call option.

  1. Uncovered or Naked Call Writing

Writing a naked call is in contrast to a covered call strategy - as the seller of the call options doesn't own the underlying assets. In other terms, we could say that when the option is not combined with the offsetting position in the underlying stock. This is a strategy that is basically adopted by the investor when they are very speculative or think the share prices are not going to move higher.

Here, the seller earns with the premium paid by the buyer. The losses would be unlimited if share prices are moved upward and exercised by the buyer. There is limited profit with a big potential for upside risk.

The payoff for writing naked call options will be as similar as writing a covered call. The only distinction is that at the time of exercise by the buyer, the seller needs to buy the underlying from the market or alternatively needs to borrow the share from a broker and sell it to the buyer at a strike price.

The Objective of Call Writing

When writing a call, you would sell someone the right to purchase an underlying stock from you at the strike price that is specified by the option series. As a call writer, you would be short of the option. The buyer of a call is long the option. You will also be obliged to deliver the stock if the buyer decides to exercise the call option.

The call writer will hope for the following mentioned factors:

  • The stock goes nowhere.
  • Collection of premium.
  • The option expires lower, so he does not need to come up with 100 shares of the stock to settle if the holder exercises that call. That is what can happen with naked call writing.

Through naked call writing, you are selling someone else an opportunity to bet that the underlying stock is going to go higher in price. The catch is to not own the stock, so if the buyer exercises the option, you would have to buy the stock at the market price to meet the obligation. When you write the covered call option - you already own the shares. If you are exercised against, you just sell your shares at the strike price.

Benefits of Call Writing

  • The fortunes of the call writer and the option buyer go in the exact opposite direction.
  • If the option buyers get a profit, the call writer will suffer a loss and vice versa.
  • The call writing strategy that makes it relatively beneficial for the call writer is the premium amount.
  • Since the value of the underlying asset goes down with time, the liability and risks of the call writer will also go down.

What is Call Writing - FAQs

What is the meaning of call writing?

Call writing means when a person has the right to buy but not the obligation and the process through which the seller sells the call option to the buyer.

What is writing a call and put?

The traders that write an option get a fee, or a premium, in exchange for giving you the option buyer the right to buy or sell the shares at a specific price and date.

How can I identify call writing?

You can look for both the call and put sides on indexes.

How does a call writer earn money?

After writing a put option, the trader earns a profit if the price stays above the strike price.

How are call options written?

Generally, they are written in multiple shares.

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