The In-The-Money Naked Call strategy involves writing deep-in-the-money call options without owning the underlying stock. It is an alternative to shorting the stock employed when one is bearish to very bearish on the underlying.
Sell 1 call.
Limited Profit Potential
The main objective of writing deep-in-the-money naked calls is to collect the premiums when the call options drop in value or expire worthless as the underlying stock price declines. Profit is limited to the premium collected for writing the call options.
The premium received.
Unlimited Loss Potential
If the stock price goes up dramatically at expiration, the call writer will be required to satisfy the options requirements to sell the obligated stock to the options holder at the lower strike price by buying the stock from the open market at higher market price. Since there is no limit to how high the stock price can be at expiration, potential losses for writing In-The-Money Naked Calls are therefore theoretically unlimited.
The premium received.
Breakeven Point(s)
Strike price plus the premium received.
Example
The stock XYZ is currently trading at $48. An options trader decides to write a JUL 40 in-the-money call for $10. So he receives $1000 for writing the call option.
On expiration date, the stock had rallied to $68. Since the striking price of $40 for the call option is lower than the current trading price, the call is assigned and the writer buys the shares for $6800 and sells them to the options holder at $4000, resulting in a loss of $2800. However, since he received $1000 earlier on, his net loss comes to $1800.
If the stock price drops moderately to $45, the call writer can realise a profit from the loss in premium value of the call option sold. Since the striking price of $40 for the call option is lower than the current trading price, the call is assigned and the writer buys the shares for $4500 and sells them to the options holder at $4000, resulting in a loss of $500. However, as he had received $1000 for the sale of the call earlier, his profit for the trade is $500.
However, what happens if the stock price goes down 20 points to $28 instead? Let's take a look.
At $28, the call expires worthless and the writer of the naked call keeps the full $1000 in premiums received as profit.
From the profit graph shown earlier, we can see that the breakeven is at $50 (Call Strike + Premium). So long as the stock price remains at $50 or below, the naked call writer will not suffer any loss.
These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.
Commissions
For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.
For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.
Similar Strategies
The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.
Before expiration and assignment
The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.
Payoff summary
Maximum loss: Unlimited as the stock price rises.
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
