Which do you think involves more risk: short OTM naked call or covered call?
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Risk Analysis: short OTM naked call Vs. covered call
- Thread starter tradingjournals
- Start date
Draw the payout graphs (P&L vs stock price) and you can compare the pros and cons for yourself.
Writing a call option by itself will give you unlimited losses on the downside if the stock price keeps rising. Adding a stock to make it a covered call will limit your loss to the stock value minus option value if the stock price goes down to zero, which is still pretty bad.
If you want to control your risk, try going for call spreads. I'm personally trying to backtest writing naked calls which are very close to expiration, with automated stop-loss triggers for safety.
Writing a call option by itself will give you unlimited losses on the downside if the stock price keeps rising. Adding a stock to make it a covered call will limit your loss to the stock value minus option value if the stock price goes down to zero, which is still pretty bad.
If you want to control your risk, try going for call spreads. I'm personally trying to backtest writing naked calls which are very close to expiration, with automated stop-loss triggers for safety.