My recent article on Naked Calls generated a lot of responses from investors. An interesting comment from one investor discusses the risk of a takeover to those investors holding naked calls. Let’s look at his comment and see if there is a solution to his concern on using naked calls.
Naked Calls Are Riskier Than Naked Puts?
Comment from investor:
Selling naked calls carries a much greater risk then selling naked puts, there is no limit how high the price can move, there is always the risk of a takeover, yes then you will really have to buy the stock . On the call side you should only use spreads to limit your risk, but most of the time the premium is too low, so you should just not do it at all. From Michael
Looking At Naked Calls Risk
The threat of a takeover is definitely a concern for some investors who sell naked calls. However for investors who sell naked puts, they have the risk of a major collapse. For investors who sell naked puts, if a stock goes to zero your loss is total with naked puts. While that may not happen too often it is interesting to note how many companies do plunge each year leaving naked put investor sholding deep in the money naked puts. This year I have received many emails from investors in Apple Stock (AAPL) holding naked puts above $650.00; Cliff Natural Resources (CLF), holding naked puts above $50; Barrick Gold Stock (ABX) holding naked puts above $40; RIMM Stock with naked puts above $50 up to $100. Add to that all the investors who had naked puts deep in the money and took huge losses on stocks like Qualcom, Bank Of America, AIG, Citigroup, Polaroid, Kodak, GM and dozens of others over the past several years. It definitely bears repeating then that naked puts are definitely not less risky than naked calls.
But what about Takeover Candidates and being caught holding naked calls? Should this be a major concern for investors interested in selling naked calls?
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