19 lines
1.3 KiB
Plaintext
19 lines
1.3 KiB
Plaintext
EXHIBIT 1.3 Naked Target call.
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If TGT is trading below the exercise price of 50, the call will expire
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worthless. Sam keeps the 1.45 premium, and the obligation to sell the stock
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ceases to exist. If Target is trading above the strike price, the call will be in-
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the-money. The higher the stock is above the strike price, the more intrinsic
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value the call will have. As a seller, Sam wants the call to have little or no
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intrinsic value at expiration. If the stock is below the break-even price at
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expiration, Sam will still have a profit. Here, the break-even price is $51.45
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—the strike price plus the call premium. Above the break-even, Sam has a
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loss. Since stock prices can rise to infinity (although, for the record, I have
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never seen this happen), the naked call position has unlimited risk of loss.
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Because a short stock position may be created, a naked call position must
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be done in a margin account. For retail traders, many brokerage firms
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require different levels of approval for different types of option strategies.
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Because the naked call position has unlimited risk, establishing it will
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generally require the highest level of approval—and a high margin
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requirement.
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Another tactical consideration is what Sam’s objective was when he
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entered the trade. His goal was to profit from the stock’s being below $50 |