The
selling of naked calls is one of the riskiest strategies of all. The potential
loss is UNLIMITED. With covered calls the trader owns the underlying shares,
writing naked options means the trader does not own the underlying stock, and
therefore remains completely exposed to the upside risk.
However, if you are comfortable with this
strategy, naked calls are the most effective strategy using near term options as
they decay more quickly. That is what you want, the faster these options become
worthless the better.
Example:
Proctor and Gamble (PG) are trading at $90.00. By
selling the 95 Call for $1.66 you will receive the $166 option premium. This is
your maximum profit. If at expiration the stock is at or below $95 you will
retain the full $166. As the
stock climbs towards $96.66 you begin to lose profit, once it has gone through
$96.66 your losses will continue with no limit.
Using ShareChart Option Strategies we can see how the naked call has no limit to losses. Go to Derivatives < Option Strategies. Select ‘Naked Call’ from the Strategy drop down box. Enter in all parameters and click ‘Update’ to see the chart.