You sell the call. You get the premium. And have unlimited upside risk. You short. You get the sale price, which is admittedly many times the premium for a call, but you've still got unlimited upside risk.
Right. But if you have $10,000 you can short, say, 1000 shares of a $10 stock. With that same $10,000, if the premium on the calls struck at $9 is $1.50, you can sell vol on the notional of more than 6600 shares. That's leverage.
In practice, "inlimited" isn't really meaningful, since no stock can ever got to $infinity per share. In fact, the broker would close the position once you were 50% or 100% or 200% in the red.
But, if the float is thin, they may well have to go into the market to get the shares to cover.
Infinity is a theoretical construct, but imagine having shorted a particular stock - we'll call it XXXX - at $5.00 on the day before Thanksgiving, 1999. After all, the stock was up from about $2 or $3 just the day before. What do you think a retail interpretation of "infinity" meant to clearing firms in the couple of days after Thanksgiving as their losses multiplied by a factor of ten...and that's not counting additional shares sold short on the way up?
(PM me for a link to a chart to illustrate the example I'm citing.)
In addition, stock sold short is fixed in terms of the ratcheting effect as the price moves up and down; with options, if you've sold calls on a fairly static underlying issue or contract, you may find yourself in a situation where the contract gets 'unhooked.' What that means, essentially, is that a sold call with a large negative gamma gets effectively shorter as the price rises. So losses are compounded, and the rush to cover never helps.
This, incidentally, is the classic "peso" problem that I refer to in my profile.
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