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’s price drops below the strike price.
There are two ways by which call options can be sold – naked call option and covered call option.
Naked Call Option
Under this option sellers of the call option are exposed to enormous risk as there is no limit to an asset’s 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.
Covered Call Option
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.