Moneyzine
Contents
/Investment Guides /Naked Call

Naked Call

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
September 20th, 2023
Advertiser Disclosure

Definition

The term naked call refers to a strategy in which the seller of a call option does not own the underlying securities outlined in the contract. Naked calls are considered an advanced options strategy, since it carries unlimited risk.

Explanation

The seller of a call option is referred to as the writer. They are obligated to sell the securities to the holder of the call option if they exercise their right. The buyer of a call pays a fee, known as a premium, to own the right to exercise their option. If the seller of a call does not own a corresponding amount of the underlying security, the option is said to be "naked," which means the seller will have to purchase shares on the open market if the buyer decides to exercise their option.

Generally, the buyer of a call option is bullish on the security, since they believe its price will increase over time. The writer of the option has a bearish, or neutral, view in the case of a covered call. A naked call is one of the riskiest options an investor can write because it carries unlimited risk (in theory).

There are two possible outcomes when writing a naked call:

  • Flat Price or Declining Price: the underlying security's value does not rise over the term of the contract, and the buyer of the call does not exercise their right to buy the securities. When this happens, the writer of the call profits from the premium.

  • Increasing Price: the underlying security's value increases over the term of the option, and the buyer of the call exercises their right to buy the securities. When this happens, the writer of the naked call must purchase the underlying securities. The writer keeps the premium they were paid; however, they must now purchase securities at a market price that is higher than the price they will be paid by the holder of the call option.

Related Terms

call option, covered call, naked put, put option

Explore Investing Further

Trading has never been easier, thanks to the rise of online platforms that enable you to buy and sell various assets at the click of a button. But with so many options available, it can be challenging to decide which platform is right for you.
Looking for a way to avoid swap fees while trading forex?
Below listed are the small reviews of the top 10 ETF brokers available across the United States.
Our top beginner's pick for copy trading is eToro. Read on for more details, plus seven good alternatives.
Swing trading stocks can be a great way for investors to take advantage of short-term stock market movements and gain significant returns. If you're interested in swing trading, the key to success lies in selecting the right stocks to buy and sell quickly for a profit.
The table below lists the best stock picks under $2, listed on public exchanges.
The table below lists the best stock picks under $1, listed both on public and OTC exchanges.
This section will highlight the best EV-trading penny stocks available in the United States.
The demand for sustainable energy has grown rapidly in recent years. This has resulted in increased scrutiny of the automotive market. As a result, the electric vehicle (EV) industry has made significant advancements.
Intelligent Bio Solutions Inc. is a life sciences company, founded in 2016 with headquarters in New York and is engaged in performing diagnostic tests, real-time monitoring, and non-invasive surgery for its patients. The firm has developed a CoV-2 Biosensor, which can be used in RNA virus detection.
Hour Loop was founded in 2013 with headquarters in Redmond, Washington. It’s an online retailer involved in e-commerce in the United States that hit the public markets on Jan 7th of 2022. The company sells home/garden decor, electronic products, kitchenware, and apparel through walmart.com, amazon.com, and hourloop.com.

Related Content

Biden Or Trump: Who Is Better For The Economy And Stocks?
Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
March 19th, 2024
When it comes to strategic business planning, accounting is front and center, shaping the course of action. At least it should be.
March 14th, 2024
DRIP Brokers: Best Brokers for Dividend Investing for March 2024
Reinvesting dividends could mean compound growth for your portfolio. But reinvesting them manually can be a hassle. This is why you could benefit from a dividend reinvestment plan (DRIP).
March 12th, 2024
How To Invest in Real Estate Without Becoming a Landlord
We all know that in order to build wealth and prepare for retirement, investing is the key. However, it can be hard to figure out what to invest in and how to put your money to good use. One of the most talked about ways to build wealth is owning property and being a landlord to bring in passive income. But what if you don’t want to do that? You can still invest in real estate!
March 6th, 2024
Investing In Nature: The Closest You'll Get To Your Money Growing On Trees
ESG (Environmental, Social, and Governance) has become a polluted word for many traders and investors - but that doesn't mean it's going completely away. Nor does that mean you can't profit from nature or sustainable practices. But there are some opportunities in the regenerative ag, conservation, and green real estate spaces.
February 29th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.