What is a naked call in options trading, and why is it risky?

A naked call is a high-risk options trading strategy where a trader sells a call option without owning the underlying stock. This exposes the trader to unlimited potential losses if the stock price rises significantly.

1. What is a Naked Call in Options Trading?

A naked call is when a trader sells (writes) a call option without holding the underlying stock. This means:

• You receive a premium: The trader collects a premium from selling the call option.
• Obligation to sell: If the option is exercised, the trader must buy the stock at the current market price and sell it at the strike price.
• Unlimited risk: Since stock prices can rise indefinitely, losses can be very high.

2. Why is a Naked Call Risky?

Selling a naked call is one of the riskiest options strategies due to the following reasons:

• Unlimited Losses: If the stock price rises sharply, the trader must buy it at a much higher price to fulfill the call option obligation.
• Margin Requirements: Brokers require high margin balances to cover potential losses.
• Market Volatility: Unexpected news or earnings reports can cause huge losses.

3. Example of a Naked Call Trade

Suppose a trader sells a call option on Stock XYZ with:

• Strike Price: ₹1,000
• Premium Received: ₹50 per share
• Lot Size: 100 shares

If Stock XYZ rises to ₹1,200, the trader must buy it at ₹1,200 and sell it at ₹1,000, leading to a ₹200 loss per share, while only earning ₹50 in premium.

4. How to Reduce Naked Call Risks?

To reduce the risks of naked calls, traders can:

• Use a Covered Call: Instead of a naked call, own the stock before selling the option.
• Set Stop-Loss Orders: Limit potential losses by setting stop-loss triggers.
• Avoid Highly Volatile Stocks: Stocks with unpredictable price movements increase risk.

5. Conclusion

Naked calls can offer quick profits through premiums but carry extremely high risks due to unlimited loss potential. It is crucial for traders to understand these risks and use safer strategies like covered calls to protect their investments.