What It Means
An uncovered call, also called a naked call, is selling a call option without owning the underlying shares (or any other position that would offset a loss) to cover it. If the buyer exercises, the seller has to deliver shares they don't already hold, buying them at whatever price the market has risen to.
How It Works
This is different from a covered call, where the seller already owns the underlying shares and simply hands them over if exercised, capping the downside at selling shares for less than they're now worth. With a naked call, there's no ceiling on how high the underlying can rise before expiry, and every rupee above the strike plus premium collected comes straight out of the seller's pocket.
Example
A trader sells an uncovered ₹25,000 Nifty call and collects a premium of ₹150 per share, ₹9,750 for a lot of 65 (Nifty's lot size at the time of writing), without holding any Nifty position. If Nifty rallies to ₹26,000 by expiry, the seller owes ₹1,000 per share in intrinsic value, ₹65,000 for the lot, against the ₹9,750 collected: a loss of ₹55,250 on a single lot.
Warning
Collecting the premium upfront can feel like free money while the trade is quiet, but a naked call's loss is open-ended. A sharp rally can wipe out many multiples of the premium collected in a single expiry.
Related Terms
- Call Option — the contract being sold uncovered
- F&O (Futures & Options) — the contract category this trade belongs to