Naked Call

Understanding the Concept of a 'Naked Call'

Within the rich tapestry of finance and investment lingo, the term 'Naked Call' holds a specific spot. This particular term is used in the sphere of options trading. If you're a newbie to the world of trading, you might find some of these terms a bit complex. But don't worry, this guide is here to make it easier for you!

What is a 'Naked Call'?

A 'Naked Call' also known as an uncovered call, is a type of options strategy. Here, an investor writes (sells) call options on the security they do not own. It's termed as 'naked' because, unlike a covered call, the seller of the option holds no position in the underlying asset to cover the contract.

The Risk Association

At its core, a 'Naked Call' is a risky strategy. This risk emerges from the fact that the seller is liable for delivering the securities to the buyer. If the security's price skyrockets, the seller's losses could theoretically be unlimited.

The Potential Rewards

Despite the risk aspect, there are potential rewards with a 'Naked Call'. The seller gets to pocket the premium from selling the call options. This can lead to a nice profit if the price of the underlying security stays the same or goes down, causing the options to expire worthless.

Conclusion

In conclusion, a 'Naked Call' is a high risk, high reward strategy. It is an advanced trading strategy, best suited for experienced investors who understand the risks involved. We hope this entry gives you a better understanding of what a 'Naked Call' is and how it is used within the context of trading. Remember, never stop learning and stay curious about the financial world!