Options University Blog

Naked call is an options strategy wherein the investor moves to write or sell the call options without having to own the underlying asset. The options are sold in the open market. This is exactly in contrast as compared to the covered call strategy. In a covered call strategy, an investor holds and owns a security which can be exercised as per the options contract.

This kind of strategy is at times known as a “short call” or an “uncovered call”.

Naked call strategy involves a lot of risk since there lies limited potential for the rise in the price of security as compared to the chances of downfall. Thus downside risk remains un-hedged since there is a condition for the stock to touch the higher than the exercise price.

This kind of advanced strategy is usually adopted only by confident investors who strongly believe in the falling prices of the underlying and continue to believe that the prices will still fall. There lies possibility of unlimited losses and the margin requirements stated are also too high. In case the margin thresholds are broken or cheated upon, the investor would be required to purchase the underlying shares in the open market. However, the investor can earn income by the way of premiums without making high initial investment of capital.

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