Definition
A naked call occurs when a speculator writes a call option on a security without ownership of that security. It is one of the riskiest options strategies because it carries unlimited risk as opposed to a naked put, where the maximum loss occurs if the stock falls to zero. A naked call is the opposite of a covered call.
Naked Call
What is a ‘Naked Call’
A naked call is an options strategy in which an investor writes (sells) call options on the open market without owning the underlying security. This stands in contrast to a covered call strategy, where the investor owns the security shares that are eligible to be exercised under the options contract.
Explaining ‘Naked Call’
A naked call strategy is inherently risky, as there is limited upside potential and (theoretically) unlimited downside potential should the stock rise above the exercise price of the options that have been sold.
Further Reading
- Estimating the cross-sectional market response to an endogenous event: Naked vs. underwritten calls of convertible bonds – www.sciencedirect.com [PDF]
- Leadership, hegemony, and the international economy: Naked emperor or tattered monarch with potential? – academic.oup.com [PDF]
- Behavioral aspects of covered call writing: an empirical investigation – www.tandfonline.com [PDF]
- The impact of option strategies in financial portfolios performance: Mean-variance and stochastic dominance approaches – papers.ssrn.com [PDF]
- The business ethics of short selling and naked short selling – link.springer.com [PDF]
