King Washington Option to Purchase Stock - Short Form
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How to fill out Option To Purchase Stock - Short Form?
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FAQ
A short call strategy is one of two simple ways options traders can take bearish positions. It involves selling call options, or calls. Calls give the holder of the option the right to buy an underlying security at a specified price. If the price of the underlying security falls, a short call strategy profits.
As options strategies go, shorting the stock and buying the call is very straightforward. One starts with shorting a stock in the usual manner. However, the investor also purchases a call option at the same time. The call gives the investor the right to buy the stock at a certain price during a specific time period.
A short call is a strategy involving a call option, which obligates the call seller to sell a security to the call buyer at the strike price if the call is exercised. A short call is a bearish trading strategy, reflecting a bet that the security underlying the option will fall in price.
With the short sale, the maximum possible profit of $78,000 would occur if the stock plummeted to zero. On the other hand, the maximum loss is potentially infinite if the stock only rises. With the put option, the maximum possible profit is $50,000 while the maximum loss is restricted to the price paid for the put.
Rather than borrowing shares, selling them, and buying them back as you would with the standard short-selling process, you can short a stock with options. Specifically, you can use call and put options to create what is known as a synthetic short position.
A short put refers to when a trader opens an options trade by selling or writing a put option. The trader who buys the put option is long that option, and the trader who wrote that option is short.
Buying a call option gives the holder the right to own the security at a predetermined price, known as the option exercise price. Conversely, buying a put option gives the owner the right to sell the underlying security at the option exercise price.
To close out a short position, traders and investors purchase the same amount of shares in the security they sold short. For example, a trader sells short 500 shares of ABC at $30 per share, and then ABC's price decreases to $10 per share. The trader covers their short position by buying back 500 shares of ABC at $10.
Some traders use a short put to buy the underlying security. For example, assume you want to buy a stock at $25, but it currently trades at $27. Selling a put option with a strike of $25 means if the price falls below $25 you will be required to buy that stock at $25, which you wanted to do anyway.
Short covering, also known as buying to cover, occurs when an investor buys shares of stock in order to close out an open short position. Once the investor purchases the quantity of shares that he or she sold short and returns those shares to the lending brokerage, then the short-sale transaction is said to be covered.