Naked Call

Naked calls are single contract strategies and are also referred to as Short calls, they involve selling or writing an option to buy a Call Option for a given Strike Price. The call writer is paid a Premium for the option and is taking the view that the market price will be below the Strike Price. Naked calls are therefore Bearish or negative about the prospects for the Underlying asset or commodity. If the price of the asset or commodity rises above the Strike Price before Expiration, the Option Writer will be assigned and obliged to sell the option contract holder the Underlying asset or commodity for the Strike Price, even though is far lower than the market price. The potential differential between the Strike Price and the market price upon Expiration is where the Option Writer is most exposed to risk with selling calls.

Naked calls have undefined risk because the price of the Underlying can go up to an indefinite amount. They are, therefore, more risky than Short puts where the Underlying can go no lower than zero. Two variations on naked calls which are lower risk are covered calls (where the option seller owns the Underlying asset if they are assigned) and call credit Spreads where an additional call with a higher Strike Price is purchased to cap the risk (which also limits the maximum profit).



Example
XYZ is trading at 100.

Short 1 x Out Of The Money (OTM) $110 Naked Call for a Premium of 0.8

Net credit received: $80

XYZ reduces to $100 at Expiration

Short 1 x Out Of The Money (OTM) $110 Naked Call expires worthless ($0)
Credit received: $80
Cost to enter: $0
Profit: $80

XYZ increases to $114 at Expiration

Short 1 x Out Of The Money (OTM) $110 Naked Call is worth 3 .8 ($380)
Credit received: $80
Cost to enter: $0
Loss: (-$300)


XYZ remains at $110 at Expiration

Short 1 x Out Of The Money (OTM) $110 Naked Call expires worthless ($0)
Credit received: $80
Cost to enter: $0
Profit: $80