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Key Takeaways
- A naked call is sold without covering shares or an offsetting option; a naked put is sold without the cash reserve or offsetting position used to secure it.
- Maximum option profit is the premium received, multiplied by the contract multiplier and quantity.
- A short call’s expiration loss grows with stock above breakeven; a short put’s maximum expiration loss equals strike minus premium at a zero stock price.
- Cash securing a short put funds the share purchase on assignment and leaves the option’s expiration payoff unchanged.
- Compare the broker’s collateral requirement, complete payoff and resulting shares before selecting the position size.
What is a naked option?
A naked option is a short call or put sold without the shares, cash reserve, or offsetting option that would cover it. The seller receives the premium and takes on the contract’s exercise obligation. For a standard physically settled equity call, assignment sells 100 shares at the strike. For a put, assignment buys 100 shares at the strike.
A covered call holds the shares deliverable on assignment. A cash-secured put reserves funds for the share purchase. An uncovered position uses the account’s approved margin treatment. Holding cash changes how a put assignment is funded; it leaves the short option’s expiration payoff unchanged.
Naked call and naked put payoff at expiration
A trader sells one 105 call for $2.50 with stock at $100. Premium is $250. At or below $105 at expiration, the call has zero intrinsic value and profit is $250. At $106, profit is $150. Breakeven is $107.50. At $130, the position loses $2,250.
Each further $1 rise above breakeven adds $100 to the call’s expiration loss. The stock price has no upper boundary.
For a 100 put sold at $3.00, maximum expiration profit is $300 at or above $100. Breakeven is $97. At $98, the position earns $100. At a zero stock price, its maximum expiration loss is $9,700.
Formula
Initial strategy-based equity call collateral per share = premium + max(0.20 × stock price − call out-of-the-money amount, 0.10 × stock price). For a put, use the put out-of-the-money amount and 0.10 × strike as the floor.- Call out-of-the-money amount = max(strike − stock price, 0); put amount = max(stock price − strike, 0).
- Multiply per-share values by the contract multiplier and quantity. For maintenance, replace opening premium with the current option market value.
- Use the broker’s displayed account requirement to plan buying power.
Worked Example
A trader sells one XYZ 105 call for $2.50 while XYZ trades at $100 and owns no shares, so the position is a naked call.
- Premium collected: $2.50 × 100 = $250
- Breakeven: $105 strike + $2.50 premium = $107.50
- Initial margin base: 20% × $100 = $20, less $5 out-of-the-money = $15, plus $2.50 premium = $17.50 × 100 = $1,750
- Loss if XYZ settles at $130: ($130 − $105 − $2.50) × 100 = $2,250
At or below $105 the call expires worthless and the trader keeps the $250. Above $107.50 the position loses money, and because the stock has no upper limit the loss can climb past the collateral posted.
Payoff at expiration
Illustrative figures from this page's example, priced by the InsiderFinance options profit calculator. Probability assumes 25% volatility, a 4% rate and 45 days to expiration.
- Max Profit
- $250.00
- Max Loss
- Unlimited
- Break-Even
- $107.50
Interactive payoff loads as you reach it
Load this setup on live SPY options. Move the strikes and scrub to any date.
Build This StrategyHow much margin does a naked option require?
The example’s initial strategy-based equity call calculation adds $2.50 premium to the greater of $20 minus $5 out-of-the-money amount or a $10 floor. The result is $17.50 per share, or $1,750 per standard contract.
For maintenance, use the option’s current market value in place of its opening premium. Check the broker's displayed requirement and available buying power for the actual account.
How traders choose a naked option and its size
Use the option chain to compare strikes, expirations, bid-ask spreads and current Greeks. Model the stock prices, dates and volatility inputs that define the trade plan, then compare collateral with the payoff at the price levels in the plan. Price structure and options flow pick the scenarios to test, and the options profit calculator shows the premium collected, the breakeven, the target-date value and the dollar loss past breakeven together.
Adding covering shares or an offsetting option creates a different complete position. Compare that package’s cash flows and payoff alongside the standalone short option.
How a naked option position ends
Buying back the short option closes its obligation. Closing profit equals opening premium minus the price paid to buy back the short option, multiplied by contract size and quantity.
Exercise or assignment instead creates the contract’s settlement transaction. For physically settled options, include the resulting shares in the position and update the account’s buying power.
Risks and limitations of naked options
- Set the buyback level before you sell a naked call, because its loss has no defined maximum. Each $1 rise above the $107.50 breakeven adds $100 per contract at expiration, and the loss can climb past the collateral posted.
- Size a naked put from its worst case. The 100 put sold at $3.00 loses $9,700 at a zero stock price and earns at most $300.
- Plan buying power from the broker’s displayed requirement, the one the account must meet. The example’s $1,750 is the initial strategy-based requirement, and maintenance moves with the option’s current market value and the stock price.
- An American-style short option can be assigned before expiration. Early assignment on the XYZ 105 call leaves the account short 100 shares at $105, and assignment on the 100 put buys 100 shares at $100, so plan the stock position and its margin before you sell.
- Before expiration, time and implied volatility move the cost to buy back the option along with the stock, and a jump in implied volatility raises that cost even with XYZ unchanged. Set the exit on the buyback price.
Bottom line
A naked option collects premium in exchange for an exercise obligation with no shares, cash reserve or offsetting option behind it. Size it from the loss at the adverse prices in your plan and from the broker’s displayed requirement, not from the premium, and decide in advance whether to buy it back or accept assignment.
Clear answers
Frequently Asked Questions
Sources and Further Reading
- OIC: Naked Call (Uncovered Call, Short Call)
- Fidelity: Uncovered Short Call Options Strategy
- Fidelity: Short Put, Uncovered
- Cboe: Strategy-Based Margin Requirements
How entries are sourced, calculated and updated: editorial methodology.