Equodity

Naked options writing can be the most risky type of options strategy that exists. You can write a naked option for both puts and calls. In fact it is so risky, you have to have good credit with your broker or a large account and be approved for their highest level of options trading before you can begin using this strategy.

However, it is not uncommon to use this strategy and the reason is because most options that are written expire worthless. So when you sell an option for the premium, the chances of that option expiring and you keeping the premium are pretty good.

The risk here is that the stock does the opposite of what you hope and then if it does it in a big way, you could end up losing a lot of money. Like Amazon for example, had you sold a call on AMZN back in April of ‘07, you would have lost a good bit a money and all while the options market was closed.

Since options don’t trade in extended hours, you could do nothing but watch as people bought up AMZN when earnings came out after the bell and then before the bell the next day. The reason I pick this stock is because AMZN is a large company, had been pretty stable on its stock price for years prior to this earnings blow out.

Since Jan of ‘05 AMZN had traded as high as $50 and as low as $26 prior to the Q 1 2007 earning released in April of 2007. So there was no reason to think that at around $40 per share, you couldn’t sell a 50 call, take the premium and move onto the next month and do it again. When earnings came out at a whopping 26 cents per share vs. 15 cents estimate, the stock shot up to over $60 per share, which meant if you sold one option naked at the 50 strike, you would have to buy 100 shares at over $60 per share in the open market and then sell it for $50 per share to the lucky option holder.

That is over a $1,000 loss and that is only one contract and at the time, depending on when you sold the option, you probably would have made very little premium on the sale, less then 1.00 since you would have been pretty far out of the money.

(AMZN: 35.03 0.00%, vol: 0, avg vol: 11,163,200)