Naked Call Strategy

The naked call strategy comes with unlimited risk and therefore is considered one of the riskiest, if not the riskiest strategy out there.

Basically to create this position all you need to do is sell a call, most likely an out of the money call. For instance say a stock is trading at $34, you sell the $40 call and make $1.5.

Max Profit

The most you can make on a trade like this is the premium you sold. So in the above example the most you could make would be $1.5. You would make your max profit as long as the stock closes below $40. That means it is a higher probability trade, but very risky.

Max Loss

The naked call comes with an unlimited risk potential. If the stock goes to $40 or higher you would have to sell the stock at the strike price, in this case $40.

So if the stock goes up to $40.05 you are forced to buy it at $40.05 and sell it at $40. If the stock goes up to $80 you are forced to buy it at $80 and sell it at $40. You can see how the risk could easily turn against you on a trade like this. In fact since there is no limit to how far the stock can go up, there is no limit to how much you can lose on a Naked Call trade.

Probability

This is a high probability trade, so if you sell out of the money you will be right more then you are wrong. Don’t confuse success rate with making money however. If you win 10 trades of $1 and lose 1 trade of $20 you still lost money.

Personally If I am going to sell a call it needs to be covered, either by the stock, or by another call with a higher strike price.