A naked option is when the investor does not have any other position in the security either in cash, or futures and 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 highly bullish on the underlying security.
How to build this strategy?
This strategy has only one leg:
Leg 1 – Buy 1 ITM/ATM/OTM Call option
Credit Spread/Debit Spread
Buying of naked call options is always a debit transaction as the buyer of the option has to pay the premium value.
This strategy has unlimited profit potential.
When is this strategy profitable?
The investor can earn large profits if the price of the underlying security rises above the strike price of the call option.
The investor faces limited risk in this strategy.
When is this strategy unprofitable?
The investor makes a loss if the price of the underlying security remains below the strike price of the call option.