Understanding Call Sales in Excel

A call sale is a type of option contract that gives the buyer the right, but not the obligation, to buy a certain amount of an underlying asset at a specified price within a certain period of time. The seller of the call sale has the obligation to sell the asset to the buyer if the buyer exercises their right to buy. The seller receives a fee, called the premium, for selling the call sale.

A call sale can be used for various purposes, such as speculation, income generation, or hedging. A speculator may buy a call sale if they expect the price of the underlying asset to rise above the strike price before expiration. A speculator can profit from exercising their right to buy at a lower price and selling at a higher price. However, if the price of the underlying asset does not rise above the strike price before expiration, or falls below it, then the speculator will lose their premium and may have to sell their asset at a lower price than they expected.

An income generator may sell a call sale if they own or have access to an underlying asset that they want to lock in some income from. By selling a call sale, they receive a premium upfront that can be used for other purposes. However, by selling a call sale, they also limit their upside potential if the price of the underlying asset rises above the strike price before expiration. They also expose themselves to downside risk if the price of the underlying asset falls below their cost basis.

A hedger may sell a call sale if they have an existing position in an underlying asset that they want to protect from adverse market movements. By selling a call sale on their position, they create an offsetting position that reduces their exposure to further losses. However, by selling a call sale on their position, they also reduce their potential profits if the price of the underlying asset rises above their strike price before expiration.

A call sale is different from other types of options contracts in several ways:

• A call option gives only one right: to buy an underlying asset at a specified price.
• A put option gives only one right: to sell an underlying asset at a specified price.
• A covered call option involves owning or having access to an underlying asset.
• An uncovered call option does not involve owning or having access to an underlying asset.
• A long call option has unlimited profit potential and limited loss potential.
• A short call option has limited profit potential and unlimited loss potential.

Basic Theory:

When an investor sells a call option, they receive a premium (payment) from the buyer. In return, the seller
assumes the obligation to sell the underlying asset at the specified strike price if the buyer decides to
exercise the option. The maximum profit for the call seller is limited to the premium received, while the
potential loss is theoretically unlimited if the underlying asset’s price rises significantly.

Procedures:

1. Identify the Underlying Asset and Option Details:
   • Determine the stock or asset for which you want to sell a call option.
   • Specify the strike price and expiration date of the call option.
2. Open Microsoft Excel:
   • Create a new spreadsheet and label columns for relevant information such as Stock Price, Strike
     Price, Premium Received, Profit, and Loss.
3. Enter Key Data:
   • Input the current stock price, the strike price of the call option, and the premium you receive for
     selling the call option.
4. Calculate Profit and Loss:
   • Use Excel formulas to calculate the potential profit and loss based on different scenarios.

Explanation:

Let’s consider a scenario with the following details:

Calculations:

1. Profit Calculation:
   • Profit per Contract = Premium Received
   • Total Profit = Profit per Contract * Number of Contracts
2. Loss Calculation:
   • Loss per Contract = (Strike Price – Current Stock Price) + Premium Received
   • Total Loss = Loss per Contract * Number of Contracts

Results:

For the given scenario:

• If the stock price is $100, the profit is $3, and the loss is $2.
• If the stock price is $110, the profit is $3, and there is no loss.
• If the stock price is $95, there is no profit, and the loss is $7.

Other Approaches:

1. Covered Call Strategy:
   • In this strategy, an investor holds the underlying asset and sells call options against it, providing
     a limited upside potential but reducing the effective cost basis.
2. Call Ratio Spread:
   • Involves selling a certain number of call options and buying a different number of higher-strike call
     options to manage risk and potentially increase profit potential.