Writing a call is a strategy that you would pursue if you feel that the market and/or the underlying stock is in a neutral or bearish trend.
As a profit, you receive the premium from the sale of the call option. This is the maximum amount you can make from this transaction. For example, say you sold one IBM 50 call with an April expiration for a premium of $5, when the price of IBM stock was at $49 a share – this would give you $500 (the multiplier would be 1 contract x 100 shares). As long as the contract expires worthless, you keep the profit of $500.
For this to happen, the price of IBM would have to remain below the exercise price of 50, in order to keep the holder (buyer) from exercising and forcing the writer to sell their shares at that price, even though the market price is higher.
This answer only describes the mechanics of a ‘short’ ‘CE’ position and we haven’t touched on the different criteria a trader should consider when making these types of trades.
Our company has developed options trading discovery software (including short calls) which takes into account your investment criteria in order to force-rank potential trades by relevancy and delivery against the trader’s criteria.