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:
- In the
initialize
method, set the start date, end date, starting cash, and Options universe. - In the
on_data
method, select the Option contract. - In the
on_data
method, place the orders.
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.
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]
Approach A: Call the OptionStrategies.naked_call
method with the details of each leg and then pass the result to the buy
method.
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.
self.market_order(atm_call.symbol, -1)
Strategy Payoff
The payoff of the strategy is
CKT=(ST−K)+PT=(CK0−CKT)×m−feeThe following chart shows the payoff at expiration:

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:
Asset | Price ($) | Strike ($) |
---|---|---|
Call | 3.35 | 185.00 |
Underlying Equity at expiration | 190.01 | - |
Therefore, the payoff is
CKT=(ST−K)+=(190.01−185)+=5.01PT=(CK0−CKT)×m−fee=(3.35−5.01)×m−fee=−1.66×100−2=−167So, the strategy loses $167.
The following algorithm implements a naked call Option strategy:
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