A naked call occurs when a speculator writes (sells) 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.
The buyer of a call option has the right to buy a specific number of shares at a strike price before an expiration date from the call option seller. Since a naked call seller does not have the stock in case the option buyer decides to exercise the option, the seller has to buy stock at the open market in order to deliver it at the strike price. Since the share price has no limits to how far it can rise, the naked call seller is exposed to unlimited risk.
Speculators who have an appetite for risk might buy a call option when they believe the price of the stock will go up and they do not have the cash available to pay for the stock at its current price. A disadvantage of the call option is that it eventually expires.
Speculators may sell a "naked call" option if they believe the price of the stock will decline or be stagnant. The risk of selling the call option is that risk is unlimited if the price of the stock goes up.
Read more about Naked Call: Examples
Famous quotes containing the word call:
“One can only call that youth healthful which refuses to be reconciled old ways and which, foolishly or shrewdly, combats the old. This is nature’s charge and all progress hinges upon it.”
—Anton Pavlovich Chekhov (1860–1904)