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Naked Call

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.

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]
… University 'Our hope must be that Debunking Economics will be read by enough people to prompt reform of our economic thinking and … DEBUNKING ECONOMICS – REVISED, EXPANDED AND INTEGRATED EDITION THE NAKED EMPEROR DETHRONED7 …

Leadership, hegemony, and the international economy: Naked emperor or tattered monarch with potential?Leadership, hegemony, and the international economy: Naked emperor or tattered monarch with potential?
academic.oup.com [PDF]
… University 'Our hope must be that Debunking Economics will be read by enough people to prompt reform of our economic thinking and … DEBUNKING ECONOMICS – REVISED, EXPANDED AND INTEGRATED EDITION THE NAKED EMPEROR DETHRONED7 …

Behavioral aspects of covered call writing: an empirical investigationBehavioral aspects of covered call writing: an empirical investigation
www.tandfonline.com [PDF]
… University 'Our hope must be that Debunking Economics will be read by enough people to prompt reform of our economic thinking and … DEBUNKING ECONOMICS – REVISED, EXPANDED AND INTEGRATED EDITION THE NAKED EMPEROR DETHRONED7 …

The impact of option strategies in financial portfolios performance: Mean-variance and stochastic dominance approachesThe impact of option strategies in financial portfolios performance: Mean-variance and stochastic dominance approaches
papers.ssrn.com [PDF]
… University 'Our hope must be that Debunking Economics will be read by enough people to prompt reform of our economic thinking and … DEBUNKING ECONOMICS – REVISED, EXPANDED AND INTEGRATED EDITION THE NAKED EMPEROR DETHRONED7 …

The business ethics of short selling and naked short sellingThe business ethics of short selling and naked short selling
link.springer.com [PDF]
… University 'Our hope must be that Debunking Economics will be read by enough people to prompt reform of our economic thinking and … DEBUNKING ECONOMICS – REVISED, EXPANDED AND INTEGRATED EDITION THE NAKED EMPEROR DETHRONED7 …



Q&A About Naked Call


What is a naked call?

A naked call occurs when a speculator writes (sells) a call option on a security without ownership of that security.

Who is doing this writing?

The writer of this strategy is typically an investor who thinks that there will be little movement in the stock price over time. This allows them to collect premium income from selling these options while still maintaining ownership of their shares should there be any increase in share value above or below where they sold those calls.

How are covered calls and naked calls similar?

Both are risky options strategies, but only one has unlimited risk.

What does the term unlimited risk mean in relation to naked calls?

Unlimited risk means that there is no limit to how much money can be lost if the stock price falls below zero.

Why would someone sell a covered call rather than writing an uncovered one?

The person selling the covered call already owns the stock, so they do not have to buy it at market value if they want to deliver it for exercise of the option.

What does it mean to write a call option?

To write a call option means that you sell someone else the right to buy your stock at a certain price, called the strike price.

How much risk are you taking with this strategy?

You have limited upside potential and theoretically unlimited downside potential should your stock rise above where you sold those calls.

Who might write (sell) a naked call?

Someone who thinks that there will be significant upward movement in the price of the underlying asset could write (sell) an uncovered or "naked" option as part of their strategy.

Why would anyone want to do this?

The seller of the option receives money for selling the option, and if they are correct about their prediction, then they can make more money by buying back their shares at a lower price than what they sold them for.