A short call option position in which the writer does not own shares of underlying stock represented by the option contracts. Uncovered calls are much riskier for the writer than a covered call, where the writer of the uncovered call owns the underlying stock. If the buyer of a call exercises the option to call, the writer would be forced to buy the asset at the current market price. Also called a "naked" asset.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
An investment strategy in which one sells a call without owning the underlying asset to hedge the risk. Unlike more complex spreads and straddles, which involve the purchase or sale of multiple options in order to profit in different ways, naked calls are straightforward calls. An investor using a naked call strategy makes a profit or loss depending on the movement of the underlying asset. The risk to a naked call is that the option will be exercised, requiring the seller to buy the underlying asset at the market price and then immediately sell it (usually at a loss) to fulfill the terms of the call. Naked calls are also called uncovered calls. See also: Covered Options. Naked Put.
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