What does a short call in options trading indicate?

What does a short call in options trading indicate?

• A. Expectation of lower volatility
• B. Anticipation of rising stock prices
• C. Belief that market prices will fall
• D. Default strategy for hedging against a stock

Answer: (C)

A short call in options trading indicates the belief that market prices will fall or, at the very least, not rise significantly above the strike price of the option. When an investor sells a call option, they are taking on the obligation to sell the underlying asset at the strike price if the option is exercised by the buyer. This action is typically motivated by the expectation that the stock price will not exceed that strike price, leading the seller to profit from the premium received for the option without having to deliver the underlying asset. If the prices do indeed decline or remain stable, the short call position can end up being profitable since the seller keeps the premium when the option expires worthless. This strategy is often used when an investor anticipates downward movement or sideways action in the stock, effectively taking advantage of time decay on the option and volatility not exceeding expectations. Consequently, the understanding of market behavior and price movements is crucial for someone who engages in selling call options; the expectation of falling or stagnant prices contributes directly to the effectiveness of this strategy.

A short call in options trading indicates the belief that market prices will fall or, at the very least, not rise significantly above the strike price of the option. When an investor sells a call option, they are taking on the obligation to sell the underlying asset at the strike price if the option is exercised by the buyer. This action is typically motivated by the expectation that the stock price will not exceed that strike price, leading the seller to profit from the premium received for the option without having to deliver the underlying asset.

If the prices do indeed decline or remain stable, the short call position can end up being profitable since the seller keeps the premium when the option expires worthless. This strategy is often used when an investor anticipates downward movement or sideways action in the stock, effectively taking advantage of time decay on the option and volatility not exceeding expectations.

Consequently, the understanding of market behavior and price movements is crucial for someone who engages in selling call options; the expectation of falling or stagnant prices contributes directly to the effectiveness of this strategy.