Understanding Uncovered Call Writing

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In an uncovered call (sometimes referred to as a “naked” call), you are selling the right to buy an equity from you which you don’t actually own at the time.

Uncovered calls present a greater risk for the writer than a covered call, where the writer 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, even if the price has increased sharply from the original strike price.

Example:

You write a call on a stock for a premium of $1, with a current market price of $10, and a strike price of $12.50. You immediately receive the $100 premium.

If the stock price stays under $12.50, then the buyer’s option expires worthless, and you will keep the $100 premium as a gain.

If the stock price rises to $17.50 and the option is exercised, you will have to buy 100 shares of the stock at the $17.50 market price to meet your obligation to sell it at $12.50. You will lose $400, representing the difference between your total $1,750 purchase cost for the stock, minus your proceeds of $1,250 from the sale of exercised stock and the $100 premium you took in for selling the option.

Comments

  1. Ary says:

    Forex is generally more riieskr than options simply because with Forex you have no right to avoid a non-hedged loss position, but instead this loss will be realized in your hands. On the other hand with options you’re granted the right to avoid a loss position by not exercising the option. Therefore Forex is generally more riieskr than options. Hedging positions, may become complicated, therefore you’ll need guidance from a an experienced mentor.

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