Investment Type: Credit
Strike Prices: OTM
Expiration Month: current month (less than 30 days)
Composition: Sell Call
| Short Call Profile Chart | ||
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Sell Call (naked call) is the other side of the coin of Buy Call. It’s widely used for combination with other strategy such as covered call. It is not recommended for beginner traders to use Sell Call by itself as it poses unlimited risks yet it only gives limited rewards.
Stock market and indices are more likely to go up in longer term and this psychology has been in the investors mind for generations. That’s why many investors (or traders) will feel more logical to Sell Naked Put (expectations are bullish) rather than Sell Naked Call (expectations are bearish)
It is very dangerous to do a Naked Call strategy with long-term options (except with Covered Call). The rule of thumb is to pick options with 1 month to expiration date. This rule also works with any strategy that has unlimited risks.
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Entry:
Investment @ Entry = Premium x No of Contracts x 100 Shares = Credit ($4,960)
Exit:
Best Case Scenario:
Profit @ Exit = (Premium x No of Contracts x 100 Shares) - Investment @ Entry = $0 - ($4,960) = $4,960
Worst Case Scenario : Unlimited Loss
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