Naked Calls
Trading naked calls is a bearish strategy with high risk and limited rewards.
How it works: You sell a call at a strike price higher than the cost of the stock. If the stock
goes down or stays the same, you make a profit. If the stock rises you are rapidly at risk for
big losses.
Example: The stock is selling at $87. You sell the $90 call for $6, or $600 per contract. If,
upon expiration, the stock is at $90 or below, you keep all of the $600. As the stock climbs,
your profit margin shrinks. After the stock rises past $96, you are in the red.
The payoff: The trade is relatively quick; most trades will use current month options because
they are helped by the erosion of time.
The drawback: Most bearish investors will use a bear call spread to limit the upside losses.
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