Risk of selling naked / uncovered options
Selling naked or uncovered options are very very risky.
For naked call option, you are obligated to sell the stock at the strike price if the option buyer decides to exercise the option. If you do not have enough stocks in your portfolio and if the price of that particular stock rises significantly, your potential losses can be substantial and theoretically unlimited.
As for naked put option, if the market price of the stock falls significantly, your potential losses can be massive too. Reason being, selling put option obligates you to buy the stock at the strike price if the option buyer exercises the option. So if the stock price falls dramatically or crashes to zero, you will be forced to fork out money to purchase the stocks at the strike price that you have selected while the stock is crashing.
All the above can lead to margin call if you do not have enough money in your account. If you are unable to put in more money in your account, the broker may liquidate whatever stocks you have in your portfolio.
All in all, options trading are risky, selling naked or uncovered options are riskier! But that said, there’s also the positive side of options as well as the act of selling options.
I mean, water that sinks the boat can also float it. Options trading is a double edged sword. If you use it carefully and wisely, you can still generate passive income.
I myself is a fan of selling options because I like to be the “house in a casino”. I like time (theta) to work with me, instead of going against me. I don’t like to hold on to “melting ice cubes” i.e. buying options because time decay will burn my premiums.
It’s difficult to elaborate in a post like this. Hence, do check out my option videos if you haven’t already. I also update some of my option trades in my weekly videos.
For naked call option, you are obligated to sell the stock at the strike price if the option buyer decides to exercise the option. If you do not have enough stocks in your portfolio and if the price of that particular stock rises significantly, your potential losses can be substantial and theoretically unlimited.
As for naked put option, if the market price of the stock falls significantly, your potential losses can be massive too. Reason being, selling put option obligates you to buy the stock at the strike price if the option buyer exercises the option. So if the stock price falls dramatically or crashes to zero, you will be forced to fork out money to purchase the stocks at the strike price that you have selected while the stock is crashing.
All the above can lead to margin call if you do not have enough money in your account. If you are unable to put in more money in your account, the broker may liquidate whatever stocks you have in your portfolio.
All in all, options trading are risky, selling naked or uncovered options are riskier! But that said, there’s also the positive side of options as well as the act of selling options.
I mean, water that sinks the boat can also float it. Options trading is a double edged sword. If you use it carefully and wisely, you can still generate passive income.
I myself is a fan of selling options because I like to be the “house in a casino”. I like time (theta) to work with me, instead of going against me. I don’t like to hold on to “melting ice cubes” i.e. buying options because time decay will burn my premiums.
It’s difficult to elaborate in a post like this. Hence, do check out my option videos if you haven’t already. I also update some of my option trades in my weekly videos.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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Successful investing is about managing risk, not avoiding it. DYODD
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