Naked Call


DEFINITION of 'Naked Call'

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.

This strategy is sometimes referred to as an "uncovered call" or a "short 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.

As a result of the risk involved, only experienced investors who strongly believe that the price of the underlying stock will fall or remain flat should undertake this advanced strategy. The margin requirements are often very high for this strategy as well due to the propensity for open-ended losses, and the investor may be forced to purchase shares on the open market prior to expiration if margin thresholds are breached. The upside to the strategy is that the investor could receive income in the form of premiums without putting up a lot of initial capital.

Want to know more? Read Naked Call Writing: A Risky Options Strategy

  1. Naked Writer

    An options seller who does not own the underlying security for ...
  2. Call

    1. The period of time between the opening and closing of some ...
  3. Long (or Long Position)

    1. The buying of a security such as a stock, commodity or currency, ...
  4. Naked Option

    A trading position where the seller of an option contract does ...
  5. Naked Put

    A put option whose writer does not have a short position in the ...
  6. Naked Position

    A securities position that is not hedged from market risk. Both ...
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  1. What types of options positions create unlimited liability?

    Selling naked calls creates unlimited liability. Therefore, these types of option strategies are considered appropriate for ... Read Full Answer >>
  2. What is the difference between a covered call and a regular call?

    A call option is a contract that gives the buyer, or holder, a right to buy an asset at a predetermined price by or on a ... Read Full Answer >>
  3. How risky is a covered call?

    A covered call is a limited risk strategy, unlike a naked call. A covered call is a strategy in which an investor has a short-term ... Read Full Answer >>
  4. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  5. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  6. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>

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