What is a naked call?
In the finances, the possibilities of the laundry they communicate, but not the obligation, sell shares at a certain price at a certain time. The possibility of calling is purchased as a way to potentially benefit from increasing the price of shares above a certain level. The seller can sell it in two different ways, commonly called naked and covered. The covered option means that the investor who sells this option owns the underlying shares. The possibility of naked calls, also known as a naked call, is more speculative and risky, because the seller does not own basic shares and is therefore exposed to theoretically unlimited loss.
Naked call and covered call have more in common than not, but the source of risk is the only big difference between them. For any possibility of calling, the seller does not believe that the price of shares or other tools will rise above a certain level called a strike price in the near future. The buyer disagrees and plans to make a profit if he is right.
For example, if the share of XYZ shares is currently traded for $ 10 (USD) per share, the investor can sell the possibility of calling with a $ 12 strike price. This is actually a statement of the seller that they do not believe that the price will rise above $ 12. When the investor sells this possibility, the buyer pays him a bonus for each share represented in the contract.
The buyer gives money to his Hunch that the stock price will rise above $ 12. If it should do this and, for example, it increased to $ 13, it still has the right to buy it for $ 12. If so, the shares can sell a profit immediately. Alternatively, he can also sell the possibility to someone else and in this case he will be sold for more than he paid for it and created another profit center for the investor. These principles relate to all call options.
Naked call means that the seller of the option does not own XYZ shares, and if this option is applied, the seller is forced to buy shares and then issell immediately. The amount of loss is the amount by which the current market price exceeds the strike. If the strike was the price for XYZ 12 USD and the current price is $ 15, the seller will lose a full $ 15 per share because he never owned shares in the first place. On the other hand, the covered call would cost only $ 3 per share for losses. It is easy to see this example of why the use of naked call is best more suitable for more sophisticated investors with high risk tolerance.