A naked call option strategy involves selling a call option without owning the underlying stock or holding an offsetting position to cover it. By selling the call option, you receive a cash premium upfront. You use this approach when you are neutral to bearish, expecting the stock price to drop or remain below the strike price so that the option expires worthless and you keep the full cash premium.
The maximum profit is strictly capped at the premium collected when opening the position. However, the maximum loss is theoretically unlimited. Because a stock price can theoretically rise without any upper limit, you face severe risk if the market surges against your position, requiring you to purchase shares at a much higher price to fulfill the contract.
- Sell $105 Call for $2.00
- Stock ≤ $105: +$200 Max Profit
- Stock at $107: $0 Breakeven
- Stock > $107: Unlimited Loss Potential (e.g., -$800 at $115)