Understanding the mechanics of selling call options before building a strategy

When we talk about hedging with options in the aluminium market, most traders and procurement professionals find buying options far more intuitive than selling them. That’s because buying options feels similar to buying insurance: simple, safe and straightforward. But when it comes to selling options, particularly selling a call, the dynamics shift drastically.

Before we explore how to structure a zero-cost collar strategy (KOLA – “Call Hour Low Allocation”), it is critical to understand the mechanics of selling options. In this episode of Hedging with Jorge, we focus on demystifying how selling a call option actually works, using plain terms and practical aluminium pricing examples.

The basics: Buying vs. Selling a call

Let’s first draw a familiar line:

• When you buy a call, you are buying the right to buy a commodity (in our case, aluminium) at a predetermined strike price. You pay a premium for this right, like buying car insurance.
• If, by the expiry (typically the third Wednesday of the month), the market price is favourable (above the strike), you exercise the option. If not, you simply abandon it.

Now here comes the twist.

Selling a call: Your right is to receive premium

When you sell a call option, your role and obligations reverse:

• Your right is to receive a premium.
• Your obligation is to sell the underlying asset (aluminium) at the strike price, should the buyer choose to exercise the option at expiry.

That’s it. You receive money upfront but commit to potentially selling aluminium at a fixed price, regardless of how high the market might go.

Let’s walk through an example to make it even clearer.

A real-world example: Selling a $2,600 aluminium call

Say you sell an aluminium call option with a strike price of $2,600, set to expire on the first Wednesday of August. You collect a $120 premium.

At expiry:

• If the market price is below $2,600, the buyer won’t exercise. You keep the premium, done and dusted.
• But if the price rises to $2,601 or more, the buyer will exercise. Now, you are obligated to sell aluminium at $2,600.

In this case, your effective proceeds will be $2,600 + $120 = $2,720, even though the market could be trading higher. You are now short the market at $2,600.

Why this matters for hedging

Understanding this dynamic is crucial before you start using strategies like zero-cost collars. You can only manage risk if you clearly know both your rights and obligations in every scenario. In the next episodes, we’ll build on this foundation to structure practical aluminium hedging tools using sold calls and puts.

Until then, remember:

• Buying a call = Right to buy, obligation to pay premium.
• Selling a call = Right to collect premium, obligation to sell if exercised.