Selling Call Options (naked call options) Strategy

A call options seller is a trader who believes in a falling market and expect to profit from the downward move. By selling call options (naked options) a trader becomes bound by obligation to sell the underlying stock at a specific price before or at the expiration date. Selling call options on a stock that is owned by a trader is called "covered call writing" or selling a covered call. The covered call has limited risk. When a trader is selling naked calls (uncovered calls), the involved risk is theoretically unlimited, even though the profits are limited.

There are some benefits with this strategy.

A call seller receives a premium for selling someone the right to purchase an asset at a particular price. If the sold calls are not exercised then the collected premium provides additional income, if the asset price is below the strike price at expiration. On the other hand a call seller is obliged to sell the asset at the exercise price, if the calls sold get exercised and if the stock price goes up, a call seller may loose more than the received premium. Furthermore, selling calls is considered a more risky options trading strategy then buying puts. As a rule, options brokers require that traders meet additional margin requirements in order to sell naked call options (uncovered options).

On the positive side, the time decay of the option works in favor of the call options seller. The time-value portion of the call premium constantly declines with time, going to zero on the expiration date. The closer to expiration the faster option loses its value. For this reason, it is often better to sell calls with one month or less until expiration.

To understand the involved risks is very important. Your risk is unlimited if you sell naked calls. If the stock price rises and stays at about the strike level at the expiration, the call seller is obliged to sell the asset at the agreed-on strike price or cover the option.

Before selling the call, it is important to analyze your expectations for the underlying asset. You can write the call approximately at-the-money and collect a larger premium, if you expect the asset price to remain stable. The premium you collect will be even larger if you sell an in-the-money call, but in this case you run a greater risk of the option being exercised.