If the price does not exceed the strike price, the buyer will not exercise the option. The only loss is the premium. That's true even if stocks plummet to zero. The same goes for owning a covered call.
The stock could drop to zero and the investor would lose all the stock money with only the remaining purchase premium. As with the sale of call options, selling put options can be protected by determining a price at which you can choose to buy back the put option if the stock falls or hedge the position with a multi-tiered option spread. The buyer of a call option pays the option premium in full at the time of entering into the contract. Afterwards, the buyer enjoys a potential benefit should the market move in their favor.
There is no possibility that the option will generate any more losses beyond the purchase price. This is one of the most attractive features of call options. For a limited investment, the buyer secures unlimited profit potential with a known and strictly limited potential loss. In the case of the 20% loss, the option holder can go on strike for more than 16 months and still not lose as much as the shareholder.
If the spot price remains above the strike price of the contract, the option expires without exercising and the issuer keeps the option premium. An option that has more time to expire tends to have a higher premium associated with it compared to an option that is close to expiration. Yes, call option buyers can close the position at any time by selling the contract at market value. On the same note, short call sellers can also close their position before expiration by buying the option back in the market.
A long call option will lose money at maturity if the share price does not exceed the breakeven price, which is the strike price plus the debit paid. Therefore, option sellers demand a higher premium because underlyings with a high IV are perceived to have a greater potential for large movements in stock prices, compared to underlyings with a low IV. Time lapse is simply the rate of decline in the value of an option's premium due to the passage of time. Because the theta is negative, the option buyer can lose money if the stock stays still or, perhaps even more frustrating, if the stock moves slowly in the right direction, but the move is offset by falling time.
With a sharp rise that moves the stock price beyond the call strike or simply closer to the call strike, you can sell the call option for a profit if you trade for more than you bought it. An investor would not pay a high premium for an option that is about to expire, as there is little chance that the option will be in-the-money or have intrinsic value. For the trader to make a profit, the stock price has to increase more than the strike price and premium of the combined options. To avoid divesting or taking shares at maturity, you can make the short call later in time or close the contract to finalize the trade.
This allows call sellers to keep the premium charged in advance for selling the contract and avoid having to meet their contractual obligation. The process in which the premium of an option decreases in value as the option approaches expiration is called a temporary decline. In other words, the selling seller receives the premium and is obliged to buy the shares if their price falls below the strike price of the sale.