Position
Sell a Call Option
Margin Requirement
Yes, must post variable margin similar to futures in a rising market
Advantages
- Raises the selling price in a stable market
- Some downside protection
- Flexible, offset at any time
Disadvantages
- Can’t benefit from higher futures price
- Downside protection is limited to the premium sold
- Offsetting before expiration will change the cost & P/L (potential increased cost to buy back in a rising market)
- Capital expense of potential margin exposure
When to Apply
- In a stable market environment or when risk to both higher and lower prices perceived to be limited
- If strike price of short call option represents a target sale price that fits into budget or operating margin
- In a high implied volatility environment historically and/or seasonally
Potential Adjustment
- In a rising market, roll up call option to higher strike price to extend range of opportunity to benefit from rising prices
- In a falling market, buy back call option to capture decay in premium, and/or roll down short call option to generate additional credit