Naked Calls? Put some clothes on!

Welcome to Stonk Enjoyer.

HUMPDAY. It’s that time of year were all you talk about is your Thanksgiving plans. If you don’t like turkey, this is a safe place.

This is not investment advice and is intended for entertainment purposes only

What am I HODLing: Calls- Covered or Naked

I talk about Covered Calls a lot in here.

They are my primary options strategy and I’ve made them into my personality type (just kidding).

I thought we could go back to the basics since there are nearly 10x more readers than a few months back (🎉) when I explained a Covered Call in my melodramatic piece on being forced to sell assigned on my favorite even lot stock: $AAPL.

Anyways, here is a short review of Covered Calls VS Naked Calls:

If the call isn’t covered… then is it… naked?!?!

Yes. 😳

A covered call is a strategy where the investor owns the underlying stock and sells call options on the same stock to generate income from the option premiums.

The buyer of the call has the right (but not the obligation) to exercise the call if they so please. The seller can collect the premium the buyer pays for the contract (usually more risk = higher premium).

The term "covered" means that the seller of the call option owns the underlying stock – they have "coverage" if the option is exercised. If the stock's price rises above the strike price, the option may be exercised, and the seller is obligated to sell the shares to the option holder at the strike price. Since the seller already owns the shares, they can deliver the shares without needing to purchase them at the current market price.

This strategy is often used when the investor expects the stock price to rise moderately or stay relatively flat. The risk is limited to the potential loss of stock appreciation above the strike price, minus the premium received.

I won’t get too much more in the weeds, but now you understand the basic mechanics and why people love to sell covered calls.

(it’s me… I’m people)

Put some clothes on!

A naked call, on the other hand, is a much riskier strategy and involves selling call options on a stock that the seller does not own. This is referred to as "naked" because the option is sold without any coverage or hedge.

If the stock price rises above the strike price and the option is exercised, the seller must purchase the shares at the market price to deliver them to the option holder.

The risk in writing naked calls is theoretically ~unlimited~, as the stock price can rise indefinitely, increasing the cost the seller has to bear to buy the shares at the market price.

Naked calls are considered a speculative strategy and are generally used by experienced traders who expect the stock price to decline or remain below the strike price of the call option.

Final Thoughts:

• A covered call limits the risk to the opportunity cost of the shares rising above the strike price (since the shares are already owned).

• A naked call involves potentially unlimited risk because if the price of the underlying asset increases significantly, the seller will have to cover the position at a much higher price.

What am I Reading?

This Monday was the Second Meet-up of the Stonk Enjoyers Book Club!

Here are the details if you want to jump in:

• Current Book: Elon Musk by Walter Isaacson

• Next meeting: 11/13/23 at 5 PM PST

• Location: X Spaces

• Discussing up to Chapter 38

Meme of the Week

Credit @CramerTracker