Call Options: Fourth Lesson

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EDUCATION ONLY

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What is a Naked Call Option?

A naked call is an options strategy in which an investor sells call options on the open market without owning the underlying security. This stands in contrast to a covered call strategy, where the investor owns the underlying security on which the call options are sold. This strategy is sometimes referred to as an “uncovered call” or a “short call.”

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Selling a Naked Call Option

A naked call option is when an option seller sells a call option without owning the underlying stock. Naked short selling of options is considered very risky since there is no limit to how high a stock’s price can go and the option seller is not “covered” against potential losses by owning the underlying stock.

When a call option buyer exercises his right, the naked option seller is obligated to buy the stock at the current market price to provide the shares to the option holder. If the stock price exceeds the call option’s strike price, then the difference between the current market price and the strike price represents the loss to the seller.

The video shows selling AMD Call Options on the Robinhood platform.

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The price difference between the underlying stock price and the strike price determines an option’s value. For buyers of a call option, if the strike price is above the underlying stock price, the option is out of the money (OTM). In this case, the option doesn’t have intrinsic value, but it may still have value based on volatility and time until expiration as either of these two factors could put the option in the money in the future. Conversely, If the underlying stock price is above the strike price, the option is in-the-money (ITM).

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