The ideal scenario when selling OTM uncovered calls is when the underlying does not breach or approach the short call’s strike price over the life of the trade and expires worthless. This allows the call to erode all of its extrinsic value by the expiration of the contract to yield maximum profit. However, when selling ITM naked calls, investors require a much larger downward price move so the option goes OTM and, ideally, expires worthless to yield a maximum profit.
In-the-money (ITM) calls are usually worth more than out-of-the-money (OTM) calls because they have intrinsic value and usually extrinsic value as well. Intrinsic value describes an option's immediate value for being ITM, which is the difference between the underlying price and the strike. An option's extrinsic value depends on several factors, such as time left to expiration and implied volatility. Although short ITM calls are usually more valuable than short OTM calls and may yield greater profits if the underlying moves down, reducing the value of the call itself, they come with greater risks.
Since short calls synthetically provide bearish exposure to a specific underlying, there may be additional risks associated with holding a short call position. While ITM options generally have higher (early) assignment risk than OTM options, some situations can increase the chance of early assignment on a short call, such as dividend risk if the underlying pays one, hard-to-borrow fees when there is heightened short interest, and theoretical unlimited losses of holding short shares after assignment. When an investor is short a call, it can convert to 100 short shares per contract before expiration if assigned, and the investor will assume the risk of short shares after assignment. This risk still applies to short calls that are not assigned as it represents the theoretical equivalent of 100 shares of short stock.
Like other short option strategies, time decay can help erode an OTM call option's value when the underlying price remains stable and doesn't approach the short call option's strike price.
Maximum profit occurs when a short call remains out of the money until expiration and expires worthless. Investors do not have to wait until the contract expires to close the position. Profit can also occur when an investor buys (covers) the short call back before it expires at a price lower than it was sold for. On the contrary, an investor can incur a loss when buying back a short call at a higher price than it was sold for.
Uncovered calls are only allowed in an IG| tastytrade margin account. Please visit the Help Center to learn more about strategies by account type.