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Which- selling a naked put or a selling a naked call option- will cause an investor to experience the greatest potential of loss if a stock price fluctuates widely?
Wiki User
∙ 12y ago
Selling a naked call. The reason is quite simple: if you sell this thing at $20 and the stock goes to $50, you are going to have to pull out $3000 (puts and calls are in 100-share lots) to buy some stock to satisfy the investor. Naked calls have unlimited risk.
Puts have limited risk. If you look at the investment websites they claim selling puts exposes you to "unlimited risk." Not true. You can only lose the strike price minus the premium; if you sell a put on Acme with a strike price of $10, and the premium (which goes to you) is 50 cents, you can lose $9.50 per share but only if Acme goes out of business. OTOH, if Acme shoots up to $38 per share and stays there, the put won't exercise (because it would be more advantageous to the put's buyer to just put in a sell order with his broker) but you get to keep the premium.
Wiki User
∙ 12y ago
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