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Naked Call Write

 Profile Version / Simplified Version / Comprehensive Version

Purpose Of Naked Call Write
1. To Profit From A Dropping Stock
2. To Put Time Decay To Your Advantage
3. To Recieve Upfront Payment For The Position


Expectation Of Naked Call Write
Stagnant or Down


Type Of Spread
Naked Option


How To Use Naked Call Write?
Sell to open At The Money (ATM) Call Options.

Sell ATM Call 		Naked Call Write Risk Graph Learn How To Read This Chart



Profit Potential of Naked Call Write :
The Naked Call Write achieves it's maximum profit when the underlying stock is below the strike price of the call options during expiration.

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Profit Calculation of Naked Call Write :
Upon expiration, there can be 2 possible scenarios for the Naked Call Write :

1. The underlying stock drops lower than the strike price
When the underlying stock is trading lower than the strike price of the Call options that you sold upon expiration, those Call options expires out of the money (OTM) and the entire price of the Call options that you sold becomes your profit.

2. The underlying stock is trading higher than the strike price
Profit / Loss = Net Credit - (Strike Price - Stock Price)


Risk / Reward of Naked Call Write:
Upside Maximum Profit: Limited
Limited to net credit recieved.

Maximum Loss: Unlimited


Break Even Point of Naked Call Write:
The breakeven point for a Naked Call Write is the point beyond which the underlying stock can rise before the position starts to go into a loss. This is calculated as:
Breakeven = Initial stock price + premium value of Call options sold.


Advantages Of Naked Call Write:

  • As the strategy results in a net credit, risk is reduced.

  • It is a simple option strategy which requires no precise calculation to execute, unlike other more complex option strategies.

  • As it involves trading only one kind of option, the commissions involved would be much lower than the rest of the other more complex option strategies

  • It allows you to profit even if the underlying stock stays completely stagnant.

  • It is a versatile option strategy which can be transformed into other option strategies in order to accomodate changing market outlooks prior to expiration.

  • Unlike in a Long Put Option, a Naked Call Write offers you a degree of protection from loss if the underlying stock should rise slightly instead of fall.


    Disadvantages Of Naked Call Write:

  • Potential profit is limited, so if the stock goes into a huge drop, one could miss out on the profit opportunity.

  • Potential loss is unlimited and one could lose a lot of money if the underlying stock rises drastically.

  • As Naked Call Write is a credit strategy that involves margin, beginners are rarely allowed to execute it with most online brokers.

  • As margin requirements can be quite large, one may not be able to Call on as many positions as one may simply by buying put options.


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