Chapter 02 · Section 2.1
Risk- Short Calls
Nick holds a short September 40 call on IBM. What is the risk he has?
a) With an increase in the price of the underlying the potential loss is unlimited.
b) With an decrease in the price of the underlying the potential loss is unlimited.
Nick is the writer of the call, he has an obligation to fill if the option is exercised. If the price of the underlying increases and the call moves out the money, the call buyer will exercise his rights and Nick will have to sell the underlying.