what happens when abc s share price declines below 50 by nov 30 since your options contract is a right not an obligation to purchase abc shares you can choose not to exercise it meaning you will not buy abc s shares in this case your losses will be limited to the premium you paid for the option 
using the formula above your profit is 3 if abc s spot price is 55 on nov 30 the payoff calculations for the seller for a call option are not very different if you sell an abc options contract with the same strike price and expiration date you stand to gain only if the price declines depending on whether your call is covered or naked your losses could be limited or unlimited the latter case occurs when you are forced to purchase the underlying stock at spot prices perhaps even more if the options buyer exercises the contract in this case your sole source of income and profits is limited to the premium you collect on expiration of the options contract the formulas for calculating payoffs and profits are as follows using the formula above your income is 1 if abc s spot price is 49 on nov 30 there are several factors to consider when it comes to selling call options be sure you fully understand an option contract s value and profitability when evaluating a trade or else you risk the stock rallying too high using call optionscall options often serve three primary purposes income generation speculation and tax management some investors use call options to generate income through a covered call strategy this strategy involves owning an underlying stock while at the same time writing a call option or giving someone else the right to buy your stock the investor collects the option premium and hopes the option expires worthless below the strike price this strategy generates additional income for the investor but can also limit profit potential if the underlying stock price rises sharply covered calls work because if the stock rises above the strike price the option buyer will exercise their right to buy it at the lower strike price this means the option writer doesn t profit from the stock s movement above the strike price the options writer s maximum profit on the option is the premium received options contracts allow buyers to obtain significant exposure to a stock for a relatively small price used in isolation they can provide substantial gains if a stock rises but they can also result in a 100 loss of the premium if the call option expires worthless due to the underlying stock price failing to move above the strike price the benefit of buying call options is that risk is always capped at the premium paid for the option investors may also buy and sell different call options simultaneously creating a call spread these will cap both the potential profit and loss from the strategy but are more cost effective in some cases than a single call option because the premium collected from one option s sale offsets the premium paid for the other investors sometimes use options to change portfolio allocations without actually buying or selling the underlying security for example an investor may own 100 shares of xyz stock and may be liable for a large unrealized capital gain not wanting to trigger a taxable event shareholders may use options to reduce the exposure to the underlying security without actually selling it in the case above the only cost to the shareholder for engaging in this strategy is the cost of the options contract itself though options profits will be classified as short term capital gains the method for calculating the tax liability will vary by the exact option strategy and holding period 2