Short Call (Naked Call)
Sell a call without owning the stock. Collects premium but carries unlimited risk to the upside. An expert-level strategy for high-volatility environments.
Overview
A Short Call (often called a "Naked Call") is one of the most powerful and dangerous strategies in options trading. When you sell a call, you are taking on the obligation to sell shares to someone else at a fixed price, no matter how high the market price goes.
[!CAUTION] Most brokers require the highest level of option clearance (Level 4 or 5) to trade naked calls. They are not appropriate for beginners because a single bad trade can wipe out an entire account.
The Setup
- Sell 1 Call: Usually Out-of-the-Money (OTM) to increase probability.
- No Stock: You do NOT own the underlying shares (if you did, it would be a Covered Call).
Why do people do it?
- High Probability: If you sell a call far above the current price, there's a very high chance the stock never reaches it, allowing you to keep the "free" premium.
- Volatility Capture: In a "Vol Crush," the price of the call can drop rapidly even if the stock price doesn't move.
Greeks: The Extreme Profile
- Delta: Negative. You lose money for every dollar the stock goes up.
- Theta: Positive. You make money every day time passes.
- Vega: Short. You want the market to be boring and for implied volatility to collapse.
Payoff
- Max Profit: The premium you received.
- Max Loss: UNLIMITED.
Summary
Unless you are a professional market maker or have a massive portfolio to hedge, you should almost always turn a naked call into a Bear Call Spread by buying a further OTM call for protection.