Selling a call option involves selling a future transaction in the underlying stock in which you’re obligated to participate. In exchange for having the option to buy 100 shares of the underlying stock from you at a specific strike price before a specific expiration date, the call buyer pays you, the call seller, a premium that typically amounts to several hundred dollars.

The call buyer is expecting the price of the underlying stock to rise to a level that’s above the strike price and your risk is that it does and you’ll be required by the option contract to buy those 100 shares at a price point that’s below market value. In addition to the risk that should the option contract be exercised you’ll suffer a loss by either having to sell shares that you own below market value or, in the event you don’t own the stock, go out and buy shares at market value then sell them at below market value you also have the uncertainty of not knowing when and if the contract will even be exercised.

So, as long as you keep the option contract open, you have an unknown risk hanging over your head with an equally unknown potential for loss. Your gain is known and fixed at the premium value you were paid to sell the contract in the first place but your loss will only be established when the contract is executed.

Selling Uncovered Calls
If you sell a call option but don’t own the underlying stock, you’re selling an “uncovered” or “naked” call. This is one of the most risky options contracts you can enter into because your potential for loss is essentially unlimited. If you don’t own the stock in question and the call option is exercised, you’ll need to buy 100 shares of the stock at current market prices and then immediately sell those shares for the strike price specified in the option contract which is no doubt much less.

In fact, selling (or “writing”) uncovered calls is so risky that most brokerages limit if you can trade in uncovered calls and how many uncovered call positions you can have at any one time. Because the potential for loss is unlimited for you and, by proxy, for your brokerage should you not have the capital to cover your losses they take special steps to protect themselves and limit their risk exposure to naked calls.

Selling Covered Calls
When you sell a call option and also own the underlying stock you’re selling a “covered” call because the contract can be fulfilled or covered from stock that’s already in your portfolio. Covered calls ensure that your maximum risk is the difference between the price at which you bought the underlying stock you wrote the call option contract on and the strike price of the contract because, in a worst case scenario, you’ll be required to deliver that stock for that strike price.

So, when selling covered calls, your risk is the opportunity cost of what you could have sold the stock for at current market prices and what you now must sell it for because the contract has been exercised by the buyer. The premium you’re paid is meant to compensate you for this risk but it can’t protect you from the loss you’ll incur if the option is exercised.

In either situation you, as the call writer, don’t want the option contract to be exercised. Your maximum profit is achieved when the option expires and you profit the entire premium that you were initially paid. Whereas time works against you as a call buyer because the option contract loses so much value over time, that same loss in value works for you as a call seller because it drastically lowers the probability that your option will be exercised.

Due to this reality, dozens of strategies have arisen to decrease the chances that a call option contract you write will be exercised. I go into these strategies in other articles as they’re often complex but, for the purposes of this article, the important thing to realize is that option expiration is your primary goal as a seller of call options.