What is a naked call?

A naked call refers specifically to a call option that is sold or written without the seller owning the underlying asset. This strategy allows the seller to receive premium income from the option; however, it carries higher risk because if the option is exercised, the seller must go into the market to purchase the underlying asset at potentially higher prices to fulfill the obligation. This is different from other strategies where the seller owns the underlying asset, which would provide a hedge against potential losses.

A deeper understanding of naked calls highlights their speculative nature, often used by traders who anticipate that the price of the underlying asset will not rise above the strike price before the option expires. If their prediction is accurate, they can retain the premium received from the option sale as profit. However, the potential for unlimited losses exists if the market price significantly exceeds the strike price.

In contrast, a call option held with an underlying asset or a call where the seller holds the underlying asset provides a differing risk-reward dynamic. Additionally, the definition of a call option that can be exercised at any time pertains to American-style options, which does not specifically define a naked call.