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A Married Call is a bearish strategy involving a short position in the underlying stock and a long call. This strategy results in a net premium received (credit) upon initial order entry due mainly to the stock position. Uses This strategy allows the investor to maintain protection on the short stock position but still have a considerable upside for profit in the event of decreases in the stock price. Because of the short stock position, this strategy requires a margin account. Risks This strategy is considered to have limited risk and high reward. The maximum gain would occur if the stock price decreases to a value of zero. The potential maximum loss is limited to the long call strike price minus the net credit received. The maximum loss would occur if the stock increases to the long call strike price by expiration and the total credit received for the strategy is lower than the long call strike price. (Total credit is equal to the proceeds of the underlying minus the cost of the long call.) Upward price movement is the largest risk associated with this strategy and should be the primary focus of the investor. Volatility declines and time decay tend to have a negative impact on this type of strategy and result in a decline of the value of the long call. Investors do not have assignment risk, but do have exercise risk at expiration. Investors could become more exposed on the short position after expiration if the long call option is out-of-the-money and expires worthless. When these risks are a concern, the best course of action may be to close all or part of the strategy prior to potential assignment.
Important Note: Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options. |
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