Selling or Writing Naked Call Options
How Do You Write Naked Calls?
How Do You Make Money Writing Naked Calls?
Related Terms:
- What are Call Options?
- What are Naked Puts?
- How to Turn $4,000 into $20,000 with Options Trading
- Best Option Brokers
What does "Writing Covered Calls" mean:
If you understand that call options give the holder the right, but not the obligation, to buy a stock at a certain price by a certain date, it's time to think about the other side of that transaction. In order for someone to buy the call option, someone has to have sold the right to that person. The person buying the call option hopes the price of the underlying stock will go up, and the person who sold that person that right is hoping the price will stay the same or go down. If the owner of the call option is going to exercise it and buy the stock at the strike price, they have to be buying it from someone, right? That person that they are buying it from is, of course, selling the stock to them at the strike price. In the transaction where a buyer buys a call the seller of the call is said to have "sold a call" or "written a call." These terms "writing" and "selling" are used interchangeably.
The person that bought the call option hopes the stock will go up and has an expected payoff that looks like this:
The person that sold or wrote that call option, however, can have two different expected outcomes depending on whether or not he owns the stock. If the seller doesn't own the underlying stock then he is said to be selling naked calls or writing naked calls. But if the seller owns the underlying stock, then he is said to be selling covered calls or writing covered calls.
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