An investor should sell a call option if there is a possibility that the price of the security may plummet. The premium amount can be recovered if the asset\u2019s price drops below the strike price.<\/p>\n
There are two ways by which call options can be sold \u2013 naked call option and covered call option.<\/p>\n
Naked Call Option<\/strong><\/p>\n Under this option sellers of the call option are exposed to enormous risk as there is no limit to an asset\u2019s price, which may result in substantial loss. A seller thus usually charges such a fee that may offset the risk involved. These options are usually exercised by big corporations, which can successfully diversify the risks.<\/p>\n Covered Call Option<\/strong><\/p>\n In this case, the seller already owns his\/her asset and on selling this option, makes a risk-free profit from the premium charged for a call option. However, the seller does not benefit if the price experiences a sharp increase. Here, the holder cannot sell this option at an increased price but only at the strike price.<\/p>\n