Naked Call

AAA

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".

INVESTOPEDIA EXPLAINS 'Naked 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

RELATED TERMS
  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. Naked Shorting

    The illegal practice of short selling shares that have not been ...
  4. Naked Put

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

    A securities position that is not hedged from market risk. Both ...
  6. Naked Option

    A trading position where the seller of an option contract does ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. If a long call is owned on the record date of a stock, is the owner of the option ...

    The owner of a long call for a stock is entitled to a dividend only if the option is exercised prior to the ex-dividend date, ... Read Full Answer >>
  4. How can an investor profit from the cyclical nature of the electronics sector?

    An investor can profit from the cyclical nature of the electronics sector in two ways. He can employ sector rotation, shifting ... Read Full Answer >>
  5. What does negative vega mean for credit spreads?

    Greek vega measures an option's sensitivity with respect to a change in the underlying asset's volatility. The vega of an ... Read Full Answer >>
  6. What options strategies are best suited for investing in the banking sector?

    The covered call option strategy allows investors to profit from the banking sector's stability and its track record for ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Naked Options Expose You To Risk

    Find out why these enticing options can spell trouble for your bottom line.
  2. Options & Futures

    Naked Call Writing: A Risky Options Strategy

    Learn about this aggressive trading strategy to generate income as part of a diversified portfolio.
  3. Options & Futures

    The Basics Of Covered Calls

    Learn how this simple options contract can work for you, even when your stock isn't.
  4. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  5. Options & Futures

    Should Your Options Go Naked?

    Compare naked strategies to credit spreads and see if the unlimited risk of going naked is worth it.
  6. Options & Futures

    How To Trade Orange Juice Options

    How do orange juice options work and which factors determine the orange juice valuations? Here's a sneak peak into the world of orange juice options.
  7. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.
  8. Options & Futures

    Why Is Best Buy Stock So Volatile?

    We look at why BBY has been so volatile in the past and whether this trend is likely to continue or abate in the future.
  9. Investing Basics

    What is a Stock Option?

    An employee stock option is a right given to an employee to buy a certain number of company stock shares at a certain time and price in the future.
  10. Options & Futures

    Circumvent Limitations of Black-Scholes Model

    Mathematical or quantitative model-based trading continues to gain momentum, despite major failures like the financial crisis of 2008-09, which was attributed to the flawed use of trading models. ...

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center