Can One Limit A Loss When Selling a Naked Call?

[ajacobson]

If you want the pure payoff of the uncovered call then do the parity trade - covered put, but all that does is deleverage a bit. Are you playing some HTB issue?
Stay well-capitalized and manage aggressively - your worst concern remains gap openings or any other gap up. No real way to get the payoff without the risk. Be a very proactive student of IV in the name. If you're are doing a portfolio of naked calls an index or vol. hedge can provide some mitigation, but the gaps up are still going to be your biggest concern. Think like a MM, not an investor.

 

[caroy]

Hello All:
I sell naked calls every so often and wondered whether I can improve
on my chances of limiting losses.

Lets say we have a 200 strike on a stock selling at 180. If it moves up and
past the strike my loss could be a disaster!!

So, I thought of putting in a buy stop order to buy the stock if it reaches 195.

If it keeps going, I bought at 195 and it gets called away at 200. And if it keeps going
I get another $5 and dont get killed if it hits 220!!
Appreciate all comments and suggestions.
If this concept would work, I will name this strategy as the cash secured Call !

In theory if you place the buy stop stock trader at your option strike + the premium received you are now hedged as every tick up in the stock is offset by a tick down in the option until expiration. It's lovely but the risk is the price goes up then comes back down below you're entry price. You' have to then decide to sell the stock or just hold the now covered call position. Having the cash on hand to do this is important as well but when you buy your stock the margin requirement should drop drastically as you've taken unlimited risk off the table. If no whipsaw it would work. Or just avoid naked call writing all together and sell the vertical bear call spread with defined risk and sleep better at night.

 

[B Lucci]

I will name this strategy as the cash secured Call !

In the options world a Cash-Secured Call (or Cash-Backed Call) is a strategy that allows an investor to purchase stock at the lower of strike price or market price during the life of the option. E.g. the investor buys a call option, and sets aside in a risk-free interest-bearing instrument enough cash to exercise it. You'll have to settle for a different name for your idea.

This strategy is the equivalent of a rain check for the underlying stock, because it allows an investor to postpone the purchase decision. The call guarantees a maximum purchase price during the life of the option, while leaving the investor free to take advantage of any downturn that might occur in the stock price.

If the stock rallies above the strike price, a call owner can consider exercising or selling to close, hopefully at a higher price. If, on the other hand, the stock is below the strike at expiration, the call expires worthless.

However, by purchasing the call option, the investor locked in an opportunity to re-consider the stock purchase. Assuming that the long-term outlook for the stock still looks good, it might be a great time to buy the stock at the new, lower market price.

If you're going to trade options then I would recommend getting the terminology correct at the get-go.

In any case if you want to sell Calls (or Puts) with some protection against an open ended loss then I recommend selling credit spreads. In your example I might consider selling the 200 Calls and buying the 210 Calls. That limits your risk to the difference between the strikes plus commissions and fees. It also limits your profit but at least you know going in what both your potential profit and loss will be.

Best

 

[Buy1Sell2]

Hello All:
I sell naked calls every so often and wondered whether I can improve
on my chances of limiting losses.

No. Other than selling calls deep out of the money or selling calls when it's highly likely that the stock will decline.