Education Series

Education Series on Derivative Contracts

Limited Profit and Unlimited loss to the Seller:

Unlike a call buyer, the writer of a call option is bearish on the underlying asset (expects that the price would fall) and the call is sold on expectation that a profit could be made to the extent of the premium received. So long as he is right, the seller makes a profit but this is limited to the premium. On the other side, the call writer may be a big loser if the value of the asset increases. In such an occasion, he has to buy it from the market at a higher price to fulfill his obligation to sell to the call buyer and this loss may be unlimited.

Covered Call
If a call is written on an asset on the backing of long position(buying) of the same asset in the cash market, it is known as a covered call. Since, the call seller has bought the required quantity of the asset in the cash market, losses due to a price increase of the asset could be eliminated.