The in-the-money naked call strategy involves writing deep-in-the-money call options without owning the underlying stock. It is an alternative to shorting the stock employed when one is bearish to very bearish on the underlying.
Sell 1 call.
Profit potential
Profit is bounded for the stated stock/index position.
The premium received.
Loss potential
Loss can increase without a finite upper bound as the underlying rises.
Unlimited as the stock price rises.
Breakeven points
Strike price plus the premium received.
Example
The stock XYZ is currently trading at $48. An options trader decides to writes a JUL 40 in-the-money call for $10. So they receive $1000 for writing the call option.
On expiration date, the stock had rallied to $68. Since the striking price of $40 for the call option is lower than the current trading price, the call is assigned and the writer buys the shares for $6800 and sell it to the options holder at $4000, resulting in a loss of $2800. However, since they received $1000 earlier on, their net loss comes to $1800.
If the stock price drops moderately to $45, the cal writer can realise a profit from the loss in premium value of the call option sold. Since the striking price of $40 for the call option is lower than the current trading price, the call is assigned and the writer buys the shares for $4500 and sell it to the options holder at $4000, resulting in a loss of $500. However, as they had received $1000 for the sale of the call earlier, their profit for the trade is $500.
However, what happens should the stock price had gone down 20 points to $28 instead? Let's take a look.
At $28, the call expires worthless and the writer of the naked call keeps the full $1000 in premiums received as profit.
From the profit graph shown earlier, we can see that the breakeven is at $50 (Call Strike + Premium). So long as the stock price remains at $50 or below, the naked call writer will not suffer any loss.
Commissions
These examples exclude commissions and fees. Include all transaction costs when evaluating the profit or loss of a position.
Similar strategies
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
Financial mechanics reviewed:
Sources: OIC strategy reference; OIC assignment guidance. Formulas use the stated payoff assumptions; examples are illustrative, not market quotes. Editorial standards and corrections.