back

root strategies

Short Naked Call

Analyzing the risk profile of a short naked call

Risk Profile & Summary

Standard Setup

We typically establish short calls by selling either
or
This placement gives this strategy a high
Risk Profile: 50 Delta Short Call

How It Works

Short
calls are a
strategy. They profit fastest when the share price falls, and stays below the
price. They have limited profit potential, the most you can make being the amount you sold them for. Naked short calls also have #{undefined_risk} which means there is no limit to how much they can lose. Like all options, short calls have a limited life span. If the share price
above the strike, your call(s) will be
and you will be obligated to sell 100 shares/call at the strike price. If the share price expires below the strike, the call(s) will be worthless, and you will not be assigned to sell or short any shares. Either way, you keep the credit received for the original sale of the call.

Why We Do This

We do not usually sell naked calls as a stand alone strategy. Sometimes it may be appropriate, however usually short calls are used as a component to other multi-leg strategies. This is due to the fact that in most standard products, calls do not bring in a great deal of
relative to the risk they carry. Most traditional investors do not have any reason to fear rising markets due to their overwhelmingly bullish portfolios. The lack of need for upside protection tempers the utilitarian value of the calls, and with it, their
Short calls do, however, offer traders a way to generate negative delta with a high probability of success. They are also typically more capital efficient than outright
They can be a great way to capitalize on contracting volatility levels, as well as the passage of time.

Summary

Assumption Neutral to bearish
A short call profits most if the share value decreases. It can, however, still turn a profit if the share price stays the same slightly increases (as long as the break even is not breached).
Cost Basis Credit
The cost basis for a short call is equal to the total credit received.
POP High
A short call typically has a higher than 50% probability of profit.
calls can reach 75% POP and higher.
Capital Requirement Low to Moderate
In a
short calls generally require less capital than short shares. The more expensive or volatile the
and the higher the call's
the more capital will be required.
Break Even (before commission and fees) The break-even for a short call is calculated by adding the credit received to the strike price. The higher the b/e, the higher the POP.

B/E = Strike + Credit
Maximum Profit Credit Received
The most you can make on a short call is the amount you sell it for.

Max Profit = Credit × 100
Maximum Loss Undefined
Short calls have undefined risk meaning there is no limit to how much you could potentially lose. Be extra cautious about your position size when dealing with undefined risk.
Capital Allocation (per position) 3-5% of

Depending on account size, 3-5% of
is the maximum amount of
I would allocate to a naked call position.
Profit Target 50%
The goal is to cash out early with around 50% of the maximum profit.
Delta (P/L rate of change) Dynamic, Negative
Short calls carry dynamic, negative delta. This means they are a bearish strategy with fluctuating delta. Delta approaches 0 as the share price falls, and becomes more negative as the share price rises.
Theta (Time decay) Positive
Short calls have a positive theta which means they profit off the passage of time.
Vega (Implied volatility sensitivity) Negative
Short calls carry negative vega. This means they benefit from decreases in
They are harmed by increases.
Gamma (P/L Momentum) Negative
Short calls carry negative gamma which means their delta decreases (becomes more negative) as the share price rises. In practical terms, the position slows into profit and accelerates into loss.

back

root strategies
Open a Tastyworks Brokerage Account