Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Table of Contents
Short and long calls are opposing options strategies: one seeks to profit from rising prices, the other from stability or market declines.
Each involves different risk profiles, trading costs or margin requirements, and sensitivities to time and volatility. Understanding how they work can help traders navigate the complexities of directional options trading.
We’ll break down how each strategy works, look at trade examples, and highlight the differences in payoff potential, time decay, and risk.
Key Points
• Short calls involve selling call options, collecting a premium that may result in income if the option expires worthless.
• Risk may be unlimited with a short call if the stock rises sharply, unless the call is covered.
• Short calls can be used to hedge against a decline in stock value.
• Long calls give option buyers the right to buy a stock at a set price, benefiting from price increases.
• Long calls offer leverage, allowing control of a large number of shares with less capital.
What’s the Difference Between Short Calls and Long Calls?
Every time a call option contract transaction takes place there is a seller and a buyer. The seller is said to be short the calls and the buyer is long the calls. “Short calls” and “long calls” are simply shorthand for two different positions and strategies.
Short calls are a bearish options strategy that may benefit from a decline in the underlying asset’s price, or from time decay in low-volatility conditions when used in a covered call. On the other hand, a long call is a bullish options strategy that aims to capitalize on upward price movements on an asset, such as a stock or exchange-traded fund (ETF).
Short calls are the opposite strategy to long calls and their potential payoffs reflect that. Long calls may offer theoretically unlimited upside, while the maximum profit for a short call is capped at the premium received.
What Are Short Calls?
“Short calls” are an options strategy involving selling a call option.
Short call sellers receive a premium when the call is sold. The seller hopes to see a decrease in the underlying asset’s price to achieve the maximum profit.
It is also possible for the seller to profit if the underlying asset price stays the same. Options prices are based on intrinsic value (the difference between the strike price and the asset price) and extrinsic value, influenced by time to expiration and volatility.
If the asset price remains below the strike price, the call has no intrinsic value — only extrinsic value, which erodes over time due to time decay. There are two types of short calls: naked calls and covered calls. Short calls are “naked” when the seller does not own the underlying asset (considered an extremely risky strategy). Short calls are “covered” when the seller owns the underlying asset at the time of sale.
Short calls have a fixed maximum profit equal to the premium collected, but risk is technically unlimited if the asset rallies sharply. Theoretically, a stock could rise to infinity, so there is no cap on how high the value of a call option could be.
Therefore short calls can be highly risky. For this reason, traders should have a risk management plan in place when they engage in naked call selling.
Short Call Example
It’s helpful to see an example of a short call to understand the upside reward potential and downside risks involved with such a strategy.
Suppose your outlook on shares of XYZ stock is neutral to bearish. You think that the stock, currently trading at $50, will trade between $45 and $50 in the next three months.
A plausible trade to execute would be to sell the $50 strike calls expiring in three months. We’ll assume those options trade at $5. The breakeven price on a short call is the strike price plus the premium collected.
In this example, the breakeven price is thus $50 plus $5 which is $55. You profit so long as the stock is below $55 by the time the options expire, but will experience losses if the stock is above $55 by expiry.
Two months pass, and the stock is at $48. The calls have dropped in value thanks to a minor share price decline and since there is less time until expiration. The drop in time value relates to decaying theta, one of the option Greeks, as they’re called. Your short calls are now valued at $2 in the market.
Fast-forward three weeks, and there are just a few days until expiration. Despite a modest rise to $49, the call options declined in value due to accelerated time decay. They are now worth just $1. Time decay has eaten away at the value of the calls — more than offsetting the rise in the underlying shares. Time decay becomes quicker as expiration approaches.
You choose to buy-to-close your options in the market rather than risk a late surge in the stock price. Most options are closed out rather than left to expire (or be exercised) as closing options positions before expiration can save on transaction costs and added margin requirements. You cover your short calls at $1 and enjoy a net profit of $4 on the trade ($5 collected at the trade’s initiation minus a $1 buyback to close the position).
Pros and Cons of Short Calls
| Pros of Short Calls | Cons of Short Calls |
|---|---|
| Benefits from time decay | Unlimited risk if the underlying asset rises sharply |
| Can be used in combination with a long stock position to generate extra income (covered call) | You may be required to deliver shares if the options holder exercises the call option |
| The underlying stock can move sideways to even slightly higher, and you may still profit | Reward is capped at the premium you received at the onset of the trade |
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What Are Long Calls?
Long calls are the opposite strategy to a short call. With a long call, the trader is bullish on the underlying asset. Once again, a key aspect of the options trade is timing.
A long call benefits when the security rises in value, but it must do so before the options expire.
Long calls have unlimited upside potential and limited downside risk. A long vs. short call differs in that respect since a short call has limited profit potential and unlimited risk.
A long call is a basic options strategy that may serve as a speculative, bullish bet on an underlying asset. It’s a simple options strategy with limited risk, which may appeal to newer traders learning directional trades.
Long Call Example
Buying a long call option is straightforward. Long calls vs. short calls involve different order types. With long calls, you input a buy-to-open order and then choose the calls you wish to purchase.
You must enter the underlying asset (often a stock or ETF, but it could be an option on a futures contract such as on a commodity or currency), along with the strike price, options expiration date, and whether the order is a market or limit order.
Suppose you go long calls on XYZ shares. The stock trades at $50 and you want to profit should the stock rise dramatically over the next month. You could buy the $60 strike calls expiring one month from now. The option premium — the cost to buy the option — might be $2. Because the call is out-of-the-money, that $2 is composed entirely of extrinsic value (also known as time value).
Since you are going long on the calls, you want the underlying stock price to rise above the strike price by expiration. It’s important to know your breakeven price with a long call — that is the strike price plus the premium paid. In our example, that is $60 plus $2 which is $62. If the stock is above $62 at expiration, you profit.
After three weeks, the stock has risen to $70 per share. Your calls are now worth $13.
That $13 of premium is made up of $10 of intrinsic value (the stock price minus the strike) and $3 of time value since there is still a chance the stock could keep increasing before expiry.
A few days before expiration, the shares have steadied at $69. Your $60 strike calls are worth $10. You decide to take your money and run.
You enter a sell-to-close order to exit the position. Your proceeds from the sale are $10, resulting in an $8 gain relative to your $2 premium outlay.
Pros and Cons of Long Calls
| Pros of Long Calls | Cons of Long Calls |
|---|---|
| Potential for unlimited gains | The premium paid can be substantial |
| Risk is limited to the premium paid | You can be correct with the directional bet and still lose money if your timing is wrong |
| Is a leveraged play on an underlying asset | There’s a chance the calls will expire worthless |
Comparing Short Calls vs Long Calls
There are important similarities and differences between a short call vs. long call to consider before you embark on a trading strategy.
Similarities
Traders use options for three primary reasons:
• Speculation — Speculators can involve taking a position in an asset or derivative based on the expectation that its price will move in a favorable direction. Investors can buy a call and hope the underlying asset rises or they can sell a call and hope the asset price drops. Either way, the investor is taking a risk and could lose their investment, or more in the case of naked short calls.
• Hedging — Short sellers of stock may sometimes buy call options with the goal of helping reduce risk associated with an existing investment or position.
• Generate Income — Covered short calls help to generate extra income in a portfolio. The seller sells a call that is out-of-the-money, collects the premium, and hopes the stock doesn’t rise to that strike price. However, the investor can also choose a strike that they would be happy to sell at such that, if the stock rises and the option is exercised, they are happy to sell their shares.
Differences
Long calls are a bullish strategy while short calls are a neutral to bearish play.
Long calls offer theoretically unlimited profit and limited loss. Short calls offer limited profit and potentially unlimited loss. Long calls offer limited downside and high upside, while short calls cap profits and expose traders to potentially Long calls offer limited downside and high upside, while short calls cap profits and expose traders to potentially unlimited loss. A long call has unlimited upside potential and losses are limited to the premium paid. A short call may incur unlimited losses, with a maximum limited to the premium collected at the onset of the trade.
Time decay works to the benefit of an options seller, such as when you enter a short call trade. However, time decay could work to the detriment of those who are long options.
When implied volatility rises, the holder of a call benefits (all else equal) since the option will have more value. When implied volatility drops, options generally become less valuable, which is to the option writer’s benefit.
It’s also important to understand the moneyness of a call option. A call option is considered in-the-money when the underlying asset’s price is above the strike price. When the underlying asset’s price is below the strike, then the call option is considered out-of-the-money.
A call writer prefers when the call is more out-of-the-money while a call holder wants the calls to turn more in-the-money.
Short Calls vs Long Calls
| Short Calls | Long Calls |
|---|---|
| Neutral-to-bearish view | Bullish view |
| A more advanced options play | A limited-risk trade that may be more approachable for options beginners |
| Profit capped at premium; losses can be unlimited | Profit potential is high; loss limited to premium paid |
The Takeaway
Long calls and short calls are option strategies that have an inverse relationship: one limits risk but requires price movement, while the other caps reward but benefits from time decay. Both are sensitive to market direction, volatility, and timing, making it critical to match the strategy with your outlook and risk tolerance.
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With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
FAQ
Are long calls better than short calls?
Neither strategy is better by default — it depends on your market outlook and risk tolerance. Long calls may benefit from rising prices, whereas short calls could lead to profits if prices stay flat or decline. Both are sensitive to time, volatility, and direction.
Like long calls, short calls require that your outlook and timing align. If the stock rallies unexpectedly, losses can mount quickly.
How do short calls and covered calls differ?
A short call, when sold without the underlying shares, is known as a naked call (or naked position) — and carries theoretically unlimited risk if the stock rises.
Covered calls involve holding the underlying stock and selling a call option against it. This strategy caps upside but can limit risk compared to a naked call, since the shares can be delivered if the option is exercised. It may be used to generate income when the stock is expected to stay flat or decline slightly. The downside is that your shares can be called away if the stock rises, and you may still incur losses if the stock drops significantly.
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