What is: Uncovered Call

What is: Uncovered Call

An uncovered call, also known as a naked call, is an options trading strategy where the seller of the call option does not own the underlying asset. This means that the seller is exposed to unlimited risk if the price of the underlying asset rises significantly.

When an investor sells an uncovered 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.

Uncovered calls are considered a high-risk strategy because the potential losses are unlimited. However, they can also be a high-reward strategy if the price of the underlying asset remains below the strike price.

Traders who use uncovered calls typically have a high tolerance for risk and are looking to capitalize on short-term price movements in the market. It is important for traders to carefully consider their risk tolerance and investment goals before using this strategy.

In conclusion, uncovered calls can be a risky but potentially rewarding options trading strategy for experienced traders. It is important to thoroughly understand the risks and rewards associated with this strategy before implementing it in your trading portfolio.