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Option Strategies

Naked Call

Introduction

A Naked Call, also known as an uncovered call, consists of selling call Options without owning the underlying asset. It's called "naked" because you don't have any cover or protection in the form of owning the underlying asset, which exposes you to potentially unlimited risk. Naked calls aim to profit from the Option premium by selling calls. At any time for American Options or at expiration for European Options, if the stock moves below the strike price, you keep the premium. If the underlying price moves above the strike, the Option buyer can exercise the Options contract, which means you need buy the underlying at market price to fulfill your obligation to sell it at the strike price and keep the premium.

Implementation

Follow these steps to implement the naked call strategy:

  1. In the initialize method, set the start date, end date, starting cash, and Options universe.
  2. Select Language:
    def initialize(self) -> None:
        self.set_start_date(2014, 1, 1)
        self.set_end_date(2014, 3, 1)
        self.set_cash(100000)
    
        self.universe_settings.asynchronous = True
        option = self.add_option("IBM")
        self._symbol = option.symbol
        option.set_filter(lambda universe: universe.include_weeklys().naked_call(30, 0))

    The naked_call filter narrows the universe down to just the one contract you need to form a naked call.

  3. In the on_data method, select the Option contract.
  4. Select Language:
    def on_data(self, slice: Slice) -> None:
        if self.portfolio.invested:
            return
    
        chain = slice.option_chains.get(self._symbol)
        if not chain:
            return
    
        # Find ATM call with the farthest expiry
        expiry = max([x.expiry for x in chain])
        call_contracts = sorted([x for x in chain
            if x.right == OptionRight.CALL and x.expiry == expiry],
            key=lambda x: abs(chain.underlying.price - x.strike))
    
        if not call_contracts:
            return
    
        atm_call = call_contracts[0]
  5. In the on_data method, place the orders.
  6. Approach A: Call the OptionStrategies.naked_call method with the details of each leg and then pass the result to the buy method.

    Select Language:
    naked_call = OptionStrategies.naked_call(self._symbol, atm_call.strike, expiry)
    self.buy(naked_call, 1)

    Approach B: Call the market_order or limit_order method.

    Select Language:
    self.market_order(atm_call.symbol, -1)

Strategy Payoff

The payoff of the strategy is

CKT=(STK)+PT=(CK0CKT)×mfee
whereCKT=Call value at time TST=Underlying asset price at time TK=Call strike pricePT=Payout total at time TCK0=Call price when the trade opened (credit received)m=Contract multiplierT=Time of expiration

The following chart shows the payoff at expiration:

Strategy payoff decomposition and analysis of naked call

The maximum profit is CK0, which occurs when the underlying price is at or below the strike price of the call at expiration.

The maximum loss is unlimited because there is no limit to how high the underlying asset's price can rise.

If the Option is American Option, there is a risk of early assignment on the contract you sell.

Example

The following table shows the price details of the assets in the algorithm:

AssetPrice ($)Strike ($)
Call3.35185.00
Underlying Equity at expiration190.01-

Therefore, the payoff is

CKT=(STK)+=(190.01185)+=5.01PT=(CK0CKT)×mfee=(3.355.01)×mfee=1.66×1002=167

So, the strategy loses $167.

The following algorithm implements a naked call Option strategy:

Select Language:
class NakedCallAlgorithm(QCAlgorithm):
    def initialize(self) -> None:
        self.set_start_date(2014, 1, 1)
        self.set_end_date(2014, 3, 1)
        self.set_cash(100000)

        option = self.add_option("IBM")
        self.symbol = option.symbol
        option.set_filter(lambda universe: universe.include_weeklys().naked_call(30, 0))

        self.call = None

        # use the underlying equity as the benchmark
        self.set_benchmark(self.symbol.underlying)

    def on_data(self, slice: Slice) -> None:
        if self.call and self.portfolio[self.call].invested:
            return

        chain = slice.option_chains.get(self.symbol)
        if not chain:
            return

        # Find ATM call with the farthest expiry
        expiry = max([x.expiry for x in chain])
        call_contracts = sorted([x for x in chain
            if x.right == OptionRight.CALL and x.expiry == expiry],
            key=lambda x: abs(chain.underlying.price - x.strike))

        if not call_contracts:
            return

        atm_call = call_contracts[0]

        naked_call = OptionStrategies.naked_call(self.symbol, atm_call.strike, expiry)
        self.buy(naked_call, 1)

        self.call = atm_call.symbol

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