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This article needs additional citations for verification. Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (January 2007) The introduction to this article provides insufficient context for those unfamiliar with the subject. Please help improve the article with a good introductory style. (October 2009) A Naked Call occurs when a speculator writes (sells) a call option on a security without ownership of that security. It is one of the riskiest options strategies because it carries unlimited risk as opposed to a naked put where the maximum loss occurs if the stock falls to zero. A naked call is the opposite of a covered call.[1] The buyer of a call option has the right to buy a specific number of shares at a strike price before an expiration date from the call option seller. Since a naked call seller does not have the stock in case the option buyer decides to exercise his option, he has to buy stock at the open market in order to deliver it at the strike price. Since the share price has no limits to how far it can rise, the naked call seller is exposed to unlimited risk. Contents 1 Examples 1.1 Scenario 1 1.2 Scenario 2 1.3 Scenario 3 1.4 Scenario 4 2 References Examples Stock XYZ is trading at $47.89 per share DEC 50 Call is trading at $1.25 premium Investor A forecasts that XYZ will not trade above $50 per share before December, so he sells the 10 DEC 50 Calls for $1,250 (each option contract controls 100 shares). Investor A doesn't buy the stock, therefore his investment is considered naked. Meanwhile, Investor B forecasts that XYZ will go above $50, so he purchases those 10 calls from Investor A for $1,250. At expiration of the option, consider 4 different scenarios where the share price drops, stays the same, rises moderately or surges. The following are four scenarios for the example: Scenario 1 Stock drops to $43.25 DEC 50 Call expires worthless Investor A keeps the entire premium of $1,250 Investor B makes a 100% loss Scenario 2 Stock stays at $47.89 DEC 50 Call expires worthless Investor A keeps the entire premium of $1,250 Investor B makes a 100% loss Scenario 3 Stock rises to $52.45 DEC 50 Call is exercised Investor A is forced to buy 1,000 shares of XYZ for $52,450 and immediately sell them at $50,000 for a loss of $2,450. Since he received the premium of $1,250 before, his net loss is $1,200. Investor B buys 1,000 shares of XYZ for $50,000 and now is able to sell them at open market for $52.45 per share if he chooses to. His net gain is $1,200 (same as Investor A's loss excluding commission costs) Scenario 4 Stock surges to $75.00 on a news announcement DEC 50 Call is exercised Investor A is forced to buy 1,000 shares of XYZ for $75,000 and immediately sell them at $50,000 for a loss of $25,000. Since he received the premium of $1,250 before, his net loss is $23,750 Investor B buys 1,000 shares of XYZ for $50,000 and now is able to sell them at open market for $75.00 per share if he chooses to. His net gain is $23,750 (same as Investor A's loss excluding commission costs) References ^ Naked And Covered Call Definitions v · d · eDerivatives market Derivative (finance) Options Terms Credit spread · Debit spread · Exercise · Expiration · Moneyness · Open interest · Pin risk · Risk-free rate · Strike price · The Greeks · Volatility Vanilla options Bond option · Call · Employee stock option · Fixed income · FX · Option styles · Put · Warrants Exotic options Asian · Barrier · Binary · Cliquet · Compound option · Forward start option · Interest rate option · Lookback · Mountain range · Rainbow option · Swaption Combinations Collar · Fence · Iron butterfly · Iron condor · Straddle · Strangle · Covered call · Protective put · Risk reversal Options spreads Backspread · Bear spread · Bull spread · Butterfly spread · Calendar spread · Diagonal spread · Ratio spread · Vertical spread · Intermarket Spread Valuation of options Binomial · Black · Black–Scholes · Finite difference · Garman-Kohlhagen · Put–call parity · Simulation · Trinomial · Vanna Volga method Swaps Basis swap · Conditional variance swap · Constant maturity swap · Correlation swap · Credit default swap · Currency swap · Dividend swap · Equity swap · Forex swap · Inflation swap · Interest rate swap · Total return swap · Variance swap · Volatility swap Forwards and Futures Backwardation · Commodity futures · Contango · Currency future · Financial future · Forward market · Forward price · Forward rate · Interest rate future · Margin · Pricing of Forwards · Pricing of Futures · Single-stock futures · Slippage Other derivatives Credit default option · CLN · Contract for difference · CPPI · Credit derivative · ELN · Equity derivative · Foreign exchange derivative · Fund derivative · Inflation derivatives · Interest rate derivative · PRDC · Real estate derivatives · Real options Market issues Tax policy · Consumer debt · Corporate debt · Government debt · Late 2000s recession