Naked Call

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Definition of 'Naked Call'

A naked call is a risky options trading strategy that involves selling a call option on a security without owning the underlying security.

In options trading, a call option gives the buyer the right, but not the obligation, to buy the underlying security at a specified price (strike price) within a certain time frame. When an investor sells a call option, they receive a premium from the buyer, and in exchange, they must be prepared to sell the underlying security to the buyer at the strike price if the buyer decides to exercise the option.

In a naked call strategy, the investor sells the call option without owning the underlying security. This means that if the buyer decides to exercise the option, the seller must purchase the underlying security at market price in order to sell it to the buyer at the strike price. If the market price of the security has risen significantly, the seller may have to purchase the security at a much higher price than the strike price, resulting in a significant loss.

Naked call strategies are considered to be very risky because they have unlimited potential losses. If the market price of the underlying security rises significantly, the losses for the investor can be substantial. For this reason, naked call strategies are generally only used by experienced traders who are willing to accept the high level of risk involved.

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