A stock is currently selling for $32 a share. You write a naked call with a strike price of $30 on the stock and receive $2.50 per option share. What is the maximum amount of money you
Could lose on this position?

Question

A stock is currently selling for $32 a share. You write a naked call with a strike price of $30 on the stock and receive $2.50 per option share. What is the maximum amount of money you
Could lose on this position?

Quizplus · Accepted Answer

When you sell a naked call, your potential losses are theoretically limitless because there is no limit to how high the stock price can go. If the stock price increases significantly above the strike price, the option buyer can exercise the option and force you to sell the stock at the lower strike price, resulting in a substantial loss. Therefore, option D is the correct answer. Since this is a naked call, the investor does not own the underlying stock. Therefore, if the stock price increases above the strike price, the investor will be obligated to buy the stock at the higher market price in order to sell it at the lower strike price, resulting in potentially unlimited losses.

A Stock Is Currently Selling for $32 a Share