C.,,er 5: Naked Call Writing 139 
third, or 33%, for the writer to lose money. Although there are not usually many 
optionable stocks selling at or just above $10 per share, these same out-of-the-money 
writers would also be attracted to selling a call with a striking price 15 when the stock 
is at 10, because a 50% upward move by the stock would be required for a loss to be 
realized. 
This strategy of selling deeply out-of-the-money calls has its apparent attraction 
in that the writer is assured of a profit unless the underlying stock can rally rather 
substantially before the call expires. The danger in this strategy is that one or two 
losses, perhaps amounting to only a couple of points each, could wipe out many peri­
ods of profits. The stock market does occasionally rally heavily in a short period, as 
witnessed repeatedly throughout history. Thus, the writer who is adopting this strat­
egy cannot regard it as a sure thing and certainly cannot afford to establish the writes 
and forget them. Close monitoring is required in case the market begins to rally, and 
by no means should losses be allowed to accumulate. 
The opposite end of the spectrum in naked call writing is the writing of fairly 
deeply in-the-money calls. Since an in-the-money call would not have much time 
value premium in it, this writer does not have much leeway to the upside. If the 
stock rallies at all, the writer of the deeply in-the-money naked call will normally 
experience a loss. However, should the stock drop in price, this writer will make 
larger dollar profits than will the writer of the out-of-the-money call. The sale of the 
deeply in-the-money call simulates the profits that a short seller could make, at least 
until the stock drops close to the striking price, since the delta of a deeply in-the­
money call is close to 1. 
Example: XYZ is selling at 60 and the July 50 call is selling for 10½. IfXYZ rises, the 
naked writer will lose money, because there is only ½ of a point of time value pre­
mium in the call. If XYZ falls, the writer will make profits on a point-for-point basis 
until the stock falls much closer to 50. That is, if XYZ dropped from 60 to 57, the call 
price would fall by almost 3 points as well. Thus, for quick declines by the stock, the 
deeply in-the-money write can provide profits nearly equal to those that the short 
seller could accumulate. Notice that if XYZ falls all the way to 50, the profits on the 
written call will be large, but will be accumulating at a slower rate as the time value 
premium builds up with the stock near the striking price. 
If one is looking to trade a stock on the short side for just a few points of nwve­
ment, he might use a deeply in-the-nwney naked write instead of shorting the stock. 
His investment will be smaller - 20% of the stock price for the write as compared to 
50% of the stock price for the short sale - and his return will thus be larger. (The 
requirement for the in-the-money amount is offset by applying the call's premium.)