Naked Call Option Strategy
What are the characteristics of this option strategy?
The Naked Call Option strategy is an advanced options trading strategy that is used to generate income. In this strategy, a trader sells out-of-the-money call options without owning the underlying security. This strategy can be used to generate a steady income from the expected time decay of the option premium. The trader benefits the most if the underlying security moves in the same direction anticipated by the trader.
Is this a bullish, bearish, or neutral strategy?
The Naked Call Option Strategy is a bearish strategy. The trader is taking a directional view of the security as he/she is selling options and looking to benefit from either the time decay of the option premiums or underlying security going down.
Is this a beginner or an advanced option strategy?
The Naked Call Option Strategy is a comparatively advanced option strategy. This strategy requires a trader to have a deep understanding of implied volatility and the impact of the delta on option prices.
In what situation will I use this strategy?
This strategy can be used in situations where the trader is expecting the underlying asset to remain range-bound or only move downward over time. The trader may also use this strategy in situations where the underlying security has high volatility and therefore, is likely to have high option premiums.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The risk-reward for the Naked Call Option strategy is typically moderate. Since the trader does not own the underlying security, the maximum reward is limited to the option premium received. The downside risk is unlimited and the probability of profit depends upon the implied volatility of the option and the trading range of the underlying asset.
How is this strategy affected by the greeks?
The greeks (delta, gamma, vega, theta, rho, etc.) have a significant impact on the performance of the Naked Call options strategy. The delta of a short Naked Call will increase over time as the option approaches expiration. Similarly, the vega of a short Naked Call will increase over time as the option approaches expiration.
In what volatility regime (i.e VIX level) would this strategy be optimal?
The Naked Call Option strategy is typically most optimal in a medium to low volatility regime. As the VIX level increases, option premiums increase, thereby reducing the potential gain from this strategy.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
It is important for traders to have a solid exit strategy for this strategy in place before entering into the position. If the trade goes against the trader, he/she should look to exit the position immediately to limit the losses.Adjusting this strategy can be somewhat difficult as it requires an understanding of the impact of the greeks on the position.
Where does this strategy typically fall in the range of commissions and fees?
The commissions and fees associated with the Naked Call Option strategy typically depends on the broker. Generally speaking, this strategy will result in higher commissions and fees compared to strategies that involve buying options.
Is this a good option income strategy?
The Naked Call Option strategy can be a good way to generate income as it has the potential to generate steady income from the time decay of the option premiums.
How do I know when to exit this strategy?
The trader should have a predetermined exit strategy in place before entering into the position. Generally speaking, it is recommended to exit the position when the option premium has been reduced to an extent that it is no longer worth holding it.
How will market makers respond to this trade being opened?
When a trader opens a Naked Call Option position, the market maker may respond in one of three ways. Firstly, the market maker may bid up the price of the option thereby reducing the potential gains from the trade. Secondly, the market maker may stay away from the trade and not submit any bid or offer. Thirdly, the market maker may even offer a spread which may result in the trader realizing higher profits.
What is an example (with calculations) of this strategy?
Suppose a trader believes that the price of security A will remain range-bound or will go down and he/she expects to benefit from the time decay of the option. The trader can then sell a Naked Call on security MSFT with a strike price of $290. At the time of entering into the position, the trader collects an option premium of $178. If the security price remains within the strike price range at expiry, the trader will receive the full premium amount. If the security price rallies above the strike price, the trader will incur losses. To calculate the maximum loss, we subtract the option premium from the strike price and multiply it by the contract multiplier.
Using MarketXLS to Help With Option Trading Strategies
Trading options can be complicated and it is important for traders to have a deep understanding of the option strategies before entering into a position. MarketXLS provides a range of Excel tools and templates that can help traders track and manage their options income. For example, traders can use the Tracking and Managing Options Income Excel Template to track their income from options trading. Similarly, traders can use the Iron Condor Excel Template to execute and manage Iron Condor trades. MarketXLS provides an array of Excel tools and templates that can be used to track and manage options trading.
Here are some templates that you can use to create your own models
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
Long Diagonal Spread With Puts Option Strategy(Excel Template)
Diagonal Spread With Calls Option Strategy (Excel Template)
Iron Condor (Excel Template)
Craft Your Own Strategy with Active Options Trading
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