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+CHAPTER 5 
+Naked Call Writing 
+The next two chapters will concentrate on various aspects of writing uncovered call 
+options. These strategies have risk ofloss if the underlying stock should rise in price, 
+but they offer profits if the underlying stock declines in price. This chapter on 
+naked, or uncovered, call writing - demonstrates some of the risks and rewards 
+inherent in this aggressive strategy. Novice option traders often think that selling 
+naked options is the "best" way to make money, because of time decay. In addition, 
+they often assume that market-makers and other professionals sell a lot of naked 
+options. In reality, neither is true. Yes, options do eventually lose their premium if 
+held all the way until expiration. However, when an option has a good deal of life 
+remaining, its excess value above intrinsic value what we call "time value premium" 
+- is, in reality, heavily influenced by the volatility estimate of the stock. This is called 
+implied volatility and is discussed at length later in the book. For now, though, it is 
+sufficient to understand that a lot can go wrong when one writes a naked option, 
+before it eventually expires. As to professionals selling a lot of naked options, the fact 
+is that most market-makers and other full-time option traders attempt to reduce their 
+exposure to large stock price movements if possible. Hence, they may sell some 
+options naked, but they generally try to hedge them by buying other options or by 
+buying the underlying stock. 
+Many novice option traders hold these misconceptions, probably because there 
+is a general belief that most options expire worthless. Occasionally, one will even hear 
+or see a statement to this effect in the mainstream media, but it is not true that most 
+options expire worthless. In fact, studies conducted by McMillan Analysis Corp. in 
+both bull and bear months indicate that about 65% to 70% of all options have some 
+value (at least half a point) when they expire. This is not to say that all option buyers 
+make money, either, but it does serve to show that many more options do not expire 
+worthless than do. 
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