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6. Short Call
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Scenario:
After a large increase this trader now believes the Eurodollar market is in for a consolidation and a mild downward fall. Implied volatility is approaching all-time highs. Premiums, therefore, are relatively large. The trader wants to capture the inflated premium through the sale of one 92.00 call.
Specifics:
| Underlying Futures Contract: | June Eurodollar | |
| Futures Price Level: | 91.97 | |
| Days to Futures Expiration: | 30 | |
| Days to Options Expiration: | 30 | |
| Option Implied Volatility: | 34.4% | |
| Option Position: | Short 1 Jun 92.00 Call | + 0.30 ($750) |
At Expiration:
| Breakeven: | 92.30 (92.00 strike + 0.30 premium) | |
| Loss Risk: | Unlimited; losses continue to increase as futures rise above 92.30 breakeven. | |
| Potential Gain: | Limited to the premium received. Maximum profit below 92.00 strike. | |
Things to Watch:
Although the trader is highly compensated for the risk assumed (with implied volatility high), the trader must watch this (and all) unlimited risk positions closely. Consider another strategy if the futures and/or volatility continue to rise. A review of the trade should occur at some predetermined place.
Follow-up Trading Strategies
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