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Archive for September, 2009

Option trading strategies – selling naked calls

Author: admin
September 3, 2009

I had to fire my stockbroker today. Wait till you find out why…

The other day my stockbroker made a comment that was so hysterically outrageous that I had to fire him. He called me up and offered to me what he thought would be some perfect option trading strategies for my portfolio.

Initially, I thought he was joking. But, after fifteen minutes on the phone with him, listening to his insistence that what he was offering was so apparently beneficial to me, I had to make a very harsh decision.

So what was this apparent deal killer strategy he was offering, you ask. Well, my stockbroker insisted that based on what he believed was a sure winner for bringing income into my account was for me to… sell naked calls.

Let me explain this option trading strategy and the risk you are going to inherit by using this strategy. Selling naked calls is a strategy where you are obligated to sell an underlying stock sometime in the future. For that obligation the buyer will pay you a small premium that you will receive into your account immediately.

Sounds good so far, huh? Well imagine this, let’s say you decide to obligate yourself to sell a specific underlying stock that you do not own and you take the small premium. Then, some amazing news comes out on the company stock and the stock value skyrockets. You now must go into the open market and buy this stock (you better have the money to buy it too) and then you turn around and give it away at a price way below what you bought it for because the buyer of your call wants the stock you just bought, so he can sell it back into the market and make a huge profit with your money.

Do you see the uncertainty of this strategy? The uncertainty is you will not know what price you will have to buy the underlying stock for until you have to buy it from the market. That is way too risky for anyone’s portfolio.

So, if you decide to sell calls, I would suggest that you own the stock in your portfolio already, just in case the buyer of the calls requests your stock if and when the stock increases in value.

Here are some additional articles for you to read:

Alan Manns

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