While reading the book ‘Understanding Options’ by ‘Robert W Kolb’ i came across this term ‘naked calls’!! Having never heard of the term before it was pretty interesting to read about it. For the uninitiated read ahead.
To start off let me talk about call options. A call option represents a right to buy. The owner of a call option has the right to purchase the stock at a pre-specified price. This right lasts with the owner/buyer till the option expires. The other party to the option is the option seller/writer. The option writer is obligated to sell the stock when the option buyer decides to execute his option. If the call writer owns the underlying stock then the option is a ‘covered call’.
Now, it need not always be necessary that one holds the stocks when he/she writes a call option. For e.g. if the writer could write a call option on stock ABC without holding the stock ABC. The option in this case would be deemed as an ‘Uncovered’ or ‘Naked’ call. In case of a naked call , the writer/seller undertakes the obligation of immediately securing the underlying stock and delivering it if the holder/buyer of the call option decides to execute the call option.
Interesting !!
No comments:
Post a Comment