Today’s video reviews the basics of the naked call strategy.
Naked Call Notes
Long Call: right to buy shares of stock at the strike price.
A) Pay a premium = max risk
Short Call: obligated to sell shares of stock at the strike price.
A) Receive a premium = max reward
I’m getting paid for a promise to sell shares
A) I already own the shares and I’m a willing seller (covered call)
B) I’m obligated myself to sell stock that I don’t own. I do this because I believe the call will expire worthless and that I won’t have to make good on my promise.
C) We are selling calls we believe will expire worthless.
Bias: Neutral to Bearish, cheaper share price, bear pattern
Structure: Sell a short-term (1 to 2 months), OTM
Max Reward = premium received
Max Risk = unlimited
Margin Requirement =similar to the naked put, 20% of stock prices
Ideal ROI: 10%
POP: 1 – delta
Usually we sell a delta of 0.20 or less.
1) Let the call expire worthless
2) Buy back the call when you capture 90% of premium.
A) sell call for 50 cents, buyback at 5 cents
1) Exit if stock breaks above resistance
2) Exit if stock reaches the call strike price.
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