What is: Naked Call

What is: Naked Call

A Naked Call is a type of options trading strategy where an investor sells a call option without owning the underlying asset. This strategy is considered risky because the seller is exposed to unlimited potential losses if the price of the underlying asset rises significantly.

When an investor sells a Naked Call, they are essentially betting that the price of the underlying asset will not rise above the strike price of the call option before the expiration date. If the price does rise above the strike price, the seller will be obligated to sell the asset at the lower strike price, resulting in a loss.

Naked Calls are often used by experienced traders who believe that the price of the underlying asset will not increase significantly. However, this strategy requires a high level of risk tolerance and careful risk management to avoid substantial losses.

It is important for investors to understand the risks associated with Naked Calls before implementing this strategy in their trading portfolio. It is recommended to consult with a financial advisor or professional before engaging in options trading, especially if you are new to the market.

In conclusion, Naked Calls can be a high-risk, high-reward strategy for experienced traders who are confident in their market predictions. However, it is crucial to have a thorough understanding of the risks involved and to implement proper risk management strategies to protect your investment.