The out-of-the-money naked call strategy involves writing out-of-the-money call options without owning the underlying stock. It is a premium collection options strategy employed when one is neutral to mildly bearish on the underlying.
Sell 1 call.
The main objective of writing naked calls is to collect the premiums when the options expire worthless. One would write an out-of-the-money naked call every month and if the stock price stays flat or drops, one would pocket the premiums and repeat the process as long as the perceived market condition remains unchanged.
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 50 out-of-the-money naked call for $3. So they receive $300 for writing the call option.
On expiration date, the stock had rallied to $68. Since the striking price of $50 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 $5000, resulting in a loss of $1800. However, since they received $300 earlier on, their net loss is $1500.
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 $300 in premiums received as profit.
From the profit graph above, we can see that the breakeven is at $53 (Call Strike + Premium). So long as the stock price remains at $53 or below, the naked call writer will not suffer any loss.
In-the-money Naked Call Write
A more bearish version of this strategy with a higher potential profit is to write deep-in-the-money naked calls.
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.