The loss for a writer of a naked call option on a share is potentially _____ and so currently short-selling is banned in Australia.

Question

The loss for a writer of a naked call option on a share is potentially _____ and so currently short-selling is banned in Australia.

Quizplus · Accepted Answer

The loss for a writer (seller) of a naked call option on a share can potentially be unlimited. This is because the writer is obligated to sell the shares at the strike price if the buyer decides to exercise the option, regardless of how high the share price may have risen. Therefore, currently short-selling (which involves selling shares that you do not own in the hope of buying them back at a lower price) is banned in Australia to protect investors from potential unlimited losses. Option A, C, and D are incorrect because the loss is not limited, it can increase as the share price rises or falls, and it may not be equal to the call premium.

The Loss for a Writer of a Naked Call Option