Short Call Payoff & Breakeven

🔑 Position summary — Short call

COVERED vs. NAKED (UNCOVERED) — the page makes this distinction explicitly:

Investments that would cover a short call:

Overview

This chapter covers the fundamentals of short call options contracts. To get comfortable with the language used when discussing options, the page directs the reader to watch a video.

• When an investor goes short a call, they’re bearish on the underlying security’s market price.
• Selling a call creates an obligation: if the option is assigned (exercised), the writer must sell the stock at the strike price.

Definitions

The contract being analyzed

Short 1 ABC Sep 75 call @ $6

This contract obligates the writer to sell ABC stock at $75 per share if assigned. The writer received $600 for selling the option ($6 premium x 100 shares). The contract expires on the third Friday in September.

By selling this call, the investor is betting ABC’s market price stays at or below $75 through expiration. If ABC rises above $75, the holder may exercise, which can create losses for the writer.

Worked example 1 — market price rises to $100

An investor goes short 1 ABC Sep 75 call @ $6. The market price rises to $100. What is the gain or loss?

Answer = $1,900 loss

Action	Result
Sell call	+$600
Buy shares	-$10,000
Assigned - sell shares	+$7,500
Total	-$1,900

The market price rose to $100, so the option is $25 in the money ($100 − $75). We can safely assume the investor is assigned, which requires selling 100 ABC shares at $75.

If the writer doesn’t already own the shares, they must buy 100 shares in the market at $100 and then sell them at $75. That creates a $2,500 loss ($25 x 100). After including the $600 premium received upfront, the net loss is $1,900.

Maximum loss

The higher the underlying security’s market price rises, the more a call writer loses if assigned. Imagine the market price rising to $125, $200, $250, and so on. Because there’s no ceiling on how high a stock price can go, the maximum loss for a short call is unlimited.

In future sections, the text covers how investors protect themselves from risk on short options. For now, here is a quick list of investments that would cover a short call:

Worked example 2 — market price rises to $81 (breakeven)

While the maximum loss for a short naked call is unlimited, call writers don’t always lose large amounts. ⚠️ Even if the option goes in the money (gains intrinsic value), the writer doesn’t have an overall loss until the assignment loss exceeds the premium received.

An investor goes short 1 ABC Sep 75 call @ $6. The market price rises to $81. What is the gain or loss?

Answer = $0 (breakeven)

Action	Result
Sell call	+$600
Buy shares	-$8,100
Assigned - sell shares	+$7,500
Total	$0

At $81, the option is $6 in the money ($81 − $75). Assuming the option is exercised (a safe assumption), the investor buys ABC shares at $81 (the market price) and sells them at $75 (the strike price). That’s a $6 per share loss, or $600 total.

The $600 premium received upfront offsets the $600 assignment loss, so the investor breaks even.

🔑 The breakeven for short call contracts can be found using this formula:

Short call breakeven = strike price + premium

Worked example 3 — market price rises to $79 (in the money, still a gain)

If ABC’s market price doesn’t rise too far past $75, the investor can still have a profit overall.

An investor goes short 1 ABC Sep 75 call @ $6. The market price rises to $79. What is the gain or loss?

Answer = $200 gain

Action	Result
Sell call	+$600
Buy shares	-$7,900
Assigned - sell shares	+$7,500
Total	+$200

At $79, the option is $4 in the money ($79 − $75). Assignment creates a $4 per share loss because the investor buys ABC shares at $79 and sells them at $75. That’s a $400 loss ($4 x 100).

After including the $600 premium received upfront, the net result is a $200 gain.

Worked example 4 — market price falls to $73 (expiration)

Expiration is the best-case scenario for investors writing (going short) options. If the option expires unexercised, the writer keeps the premium and never has to fulfill the obligation. The same applies to short call contracts.

An investor goes short 1 ABC Sep 75 call @ $6. The market price falls to $73. What is the gain or loss?

Answer = $600 gain

Action	Result
Sell call	+$600
Total	+$600

At $73, the option is $2 out of the money because the market price is below the $75 strike price. When the market price is at or below $75, the holder won’t exercise. There’s no reason to buy stock for $75 when it’s trading for $73.

This is the best-case scenario for the call writer: they sold the call for $600 and the option expires.

Maximum gain

Investors with short options can only make the premium, nothing more. If exercise occurs, losses start reducing that premium and can eventually turn the position into a net loss.

Worked example 5 — closing transaction

Writers can also perform closing transactions to exit their obligations before expiration.

An investor goes short 1 ABC Sep 75 call @ $6. After ABC’s market price rises to $79, the premium rises to $9, and the investor performs a closing purchase. What is the gain or loss?

Answer = $300 loss

Action	Result
Sell call	+$600
Close call	-$900
Total	-$300

To find the profit or loss on a closing transaction, compare:

• the premium received when the option was sold, and
• the premium paid to buy it back.

Here, the investor received $6 when selling the call and paid $9 to close it. That’s a $3 net loss per share. Since one options contract represents 100 shares, the total loss is $300.

Visual summary

The page presents “a visual summarizing the important aspects of short calls.”

Key points

Short calls

• Bearish investments
• Obligation to sell stock at the strike price
• Considered “naked” without a hedge

Covers a short call

• Long shares
• Long call
• Rights or warrants
• Convertible securities

Short call formulas

• Maximum gain = premium
• Maximum loss = unlimited
• Breakeven = strike + premium

Sources

Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.