4/8/23, 6:54 PM Short Call | Naked (Uncovered) Call Strategies - The Options Playbook

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The Options Strategies » Short Call

Short Call
AKA Naked Call; Uncovered Call

The Setup
Sell a call, strike price A
Generally, the stock price will be
below strike A

Who Should Run It

All-Stars only

NOTE: Uncovered short calls (selling a

call on a stock you don’t own) is only
The Strategy suited for the most advanced option traders.
It is not a strategy for the faint of heart.
Selling the call obligates you to sell stock at strike price A if the
option is assigned. When to Run It
When running this strategy, you want the call you sell to expire
You’re bearish to neutral.
worthless. That’s why most investors sell out-of-the-money options.

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This strategy has a low profit potential if the stock remains below
strike A at expiration, but unlimited potential risk if the stock goes
up. The reason some traders run this strategy is that there is a high
Break-even at Expiration
probability for success when selling very out-of-the-money options.
If the market moves against you, then you must have a stop-loss Strike A plus the premium received for the
plan in place. Keep a watchful eye on this strategy as it unfolds. call.

Options Guy's Tips The Sweet Spot

There’s a large sweet spot. As long as the
stock price is at or below strike A at
You may wish to consider ensuring that strike A is around expiration, you make your maximum
one standard deviation out-of-the-money at initiation. That will profit. That’s why this strategy is enticing
increase your probability of success. However, the higher the strike to some traders.
price, the lower the premium received from this strategy.

Some investors may wish to run this strategy using index options
Maximum Potential Profit
rather than options on individual stocks. That’s because historically,
indexes have not been as volatile as individual stocks. Fluctuations Potential profit is limited to the premium
in an index’s component stock prices tend to cancel one another out, received for selling the call.
lessening the volatility of the index as a whole.
If the stock keeps rising above strike A,
you keep losing money.

Maximum Potential Loss

Risk is theoretically unlimited. If the stock
keeps rising, you keep losing money. You
may lose some hair as well. So hold onto
your hat and stick to your stop-loss if the
trade doesn’t go your way.

Ally Invest Margin

Requirement
Margin requirement is the greater of the
following:

25% of the underlying security value

minus the out-of-the-money amount
(if any), plus the premium received
OR 10% of the underlying security
value plus the premium received

NOTE: The premium received from

establishing the short call may be applied
to the initial margin requirement.

After this position is established, an

ongoing maintenance margin requirement
may apply. That means depending on how
the underlying performs, an increase (or

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4/8/23, 6:54 PM Short Call | Naked (Uncovered) Call Strategies - The Options Playbook

decrease) in the required margin is

possible. Keep in mind this requirement is
subject to change and is on a per-contract
basis. So don’t forget to multiply by the
total number of contracts when you’re
doing the math.

As Time Goes By
For this strategy, time decay is your friend.
You want the price of the option you sold
to approach zero. That means if you choose
to close your position prior to expiration, it
will be less expensive to buy it back.

Implied Volatility
After the strategy is established, you want
implied volatility to decrease. That will
decrease the price of the option you sold,
so if you choose to close your position
prior to expiration it will be less expensive
to do so.

Check your strategy with Ally Invest tools

Use the Profit + Loss Calculator to establish break-even points, evaluate how your strategy might
change as expiration approaches, and analyze the Option Greeks.
Use the Probability Calculator to verify that the call you sell is about one standard deviation out-of-the-
money.
Use the Technical Analysis Tool to look for bearish indicators.

Don’t have an Ally Invest account? Open one today!

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