A naked option is when the investor does not have any other position in the same security in either cash, futures or options.
Naked options positions are for those investor who have a high risk appetite and are very sure about the direction of the market.
When to use this strategy?
This strategy is used when the investor is bearish on the undelrying security.
How to build this strategy?
This strategy comprises of only one leg:
Sell 1 OTM/ATM/ITM Call
Credit Spread/Debit Spread
This is a Credit Spread Strategy
This strategy has limited profit potential.
The profit potential is limited to the net premium received.
When is this strategy profitable?
The investor earns a profit when the price of the underlying security is below the strike price of the call option.
The investor faces unlimited risk in this strategy.
When is this strategy unprofitable?
The investor will have to bear large losses incase the underlying security price increases sharply.