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The Different Option Strategies
Naked Call
A Naked Call is a bearish to neutral position. The seller will collect the option premium should the fail to rally.
Naked Call
Risk: Unlimited
Reward: Limited
The Trade: Sell a Call short. Selling naked calls is a risky strategy and should therefore be utilised with caution and in conjunction alongside a solid plan for reducing risk should the market move against the trade.

ABC Stock trading at £5.00

Sell or 'write' 1 Sep £5.50 call (see pay-off diagram below)

Options - Naked Put

When to use: You are sure that the price will not rise and/or expect lower volatility. Sell higher strike options if you are only somewhat convinced; sell lower strike options if you are very confident the index/stock will stagnate or fall.

Sell at-the-money options for maximum profit.

Volatility expectation: Bearish, increases in volatility hurt the position.
Profit: Profit is limited to the premium received.
Loss: Unlimited in a rising market
Breakeven: Underlying settles at strike plus premium received
Time decay: This position is a growing asset. As time passes, value of position increases as option loses its time value.

Trading ideas and tactics:

  • Look to sell when a stock spikes especially when volatility is high

  • Great way to trade when the stock/index has already made a strong move higher

  • Look at charts to get some market character, ie has the stock shown any high volatility characteristics in the past

  • Have an Iron Clad plan for getting out if the market takes off. My advice is simple and it will keep you out of trouble over the years - If the price of the option doubles then pick up the phone and automatically buy it back, don't try and get clever. For example if you sell an call options short at 50 points, if it trades at 100 then buy it back. Same advice for selling Puts short
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