Examples
Stock XYZ is trading at $47.89 per share DEC 50 Call is trading at $1.25 premium
Investor A ("A") forecasts that XYZ will not trade above $50.00 per share before December, so A sells the 10 DEC 50 Calls for $1,250.00 (each option contract controls 100 shares). A doesn't buy the stock, therefore A's investment is considered naked.
Meanwhile, Investor B ("B") forecasts that XYZ will go above $50.00 per share before December, so B purchases those 10 calls from A for $1,250.00. At expiration of the option, consider 4 different scenarios where the share price drops, stays the same, rises moderately or surges.
Assuming there are no other costs or taxes affecting the contract, when A) the date is December 1 or B) prices rise above $50.00, one of two general things happen: 1) B makes a 100% loss, 2) B profits by the same amount of A's net loss.
The following are four scenarios for the example:
Read more about this topic: Naked Call
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