The potential loss for a writer of a naked call option on a stock is ________.
A) equal to the call premium
B) larger the lower the stock price
C) limited
D) unlimited

Question

The potential loss for a writer of a naked call option on a stock is ________.
A) equal to the call premium
B) larger the lower the stock price
C) limited
D) unlimited

Quizplus · Accepted Answer

A naked call option is when the writer (seller) of the call option does not hold a long position in the underlying stock. Therefore, if the stock price rises above the strike price, the writer can potentially face unlimited losses. This is because they would be obligated to sell the stock at the lower strike price and buy it back at the higher market price, resulting in a loss. The potential loss is not limited to just the call premium, and it increases the higher the stock price rises.

The Potential Loss for a Writer of a Naked Call