499
OPTION TrAdINg STrATegIeS
Comment. The short call is a bearish position with a maximum potential gain equal to the premium 
received for selling the call and unlimited risk. However, in return for assuming this unattractive 
maximum reward/maximum risk relationship, the seller of a call enjoys a greater probability of 
realizing a profit than a loss. Note the short at-the-money call position will result in a gain as long as 
the futures price at the time of the option expiration does not exceed the futures price at the time 
of the option initiation by an amount greater than the premium level ($38.80/oz in our example). 
However, the maximum possible profit (i.e., the premium received on the option) will only be real-
ized if the futures price at the time of the option expiration is below the prevailing market price at the 
time the option was sold (i.e., the strike price). The short call position is appropriate if the trader is 
modestly bearish and views the probability of a large price rise as being very low . If, however, the trader 
anticipated a large price decline, he would probably be better off buying a put or going short futures.
Strategy 4b: Short Call (Out-of-the-Money)
example. Sell August $1,300 gold futures call at a premium of $9.10/oz ($910), with August gold 
futures trading at $1,200/oz. (See Table 35.4b and Figure 35.4b.)
Comment. The seller of an out-of-the-money call is willing to accept a smaller maximum gain (i.e., 
premium) in exchange for increasing the probability of a gain on the trade. The seller of an out-of-
the-money call will retain the full premium received as long as the futures price does not rise by an 
amount greater than the difference between the strike price and the futures price at the time of the 
option sale. The trade will be profitable as long as the futures price at the time of the option expiration 
is not above the strike price by more than the option premium ($9.10/oz in this example). The short 
out-of-the-money call represents a less bearish posture than the short at-the-money call position. 
Whereas the short at-the-money call position reflects an expectation that prices will either decline 
or increase only slightly, the short out-of-the-money call merely reflects an expectation that prices 
will not rise sharply.
tabLe 35.4b profit/Loss Calculations: Short Call (Out-of-the-Money)
(1) (2) (3) (4) (5)
Futures price at 
expiration ($/oz)
premium of august $1,300 
Call at Initiation ($/oz)
$ amount of 
premium received
Value of Call 
at expiration
profit/Loss on 
position [(3) – (4)]
1,000 9.1 $910 $0 $910
1,050 9.1 $910 $0 $910
1,100 9.1 $910 $0 $910
1,150 9.1 $910 $0 $910
1,200 9.1 $910 $0 $910
1,250 9.1 $910 $0 $910
1,300 9.1 $910 $0 $910
1,350 9.1 $910 $5,000 –$4,090
1,400 9.1 $910 $10,000 –$9,090