Naked Call

The naked call is considered as one of the riskiest strategies since because the potential for loss is unlimited. Here the seller of the naked call is highly exposed to risk because he does not possess the underlying stock. This is what makes it different with the covered call where the seller owns the stock.

This strategy is best used in near term because the options decay faster and hopefully it becomes worthless. Here is an example, of a naked call.

Supposing ABC is trading at $166.20. by selling 180 calls for $2.70, you will get $270 in premium. This will be your maximum profit. If the price of the stock at expiration is below the $180, you can keep your $270. On the other hand, if the stock reaches $186, your will have no profit. If the stock goes beyond the $186, then your loss will depend on how far the stock will climb up.

You can therefore tell how risky this strategy is. To limit the upside losses, it is best to use the bear call spread using the out-of-money call.