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1. What is the rationale for naked calls and naked puts?

1. What is the rationale for naked calls and naked puts?

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Answer #1

Naked call is writing a call option . Under this this there is unlimited risk is the stock prices falls and limited profit in upside.It provides profit only in form of call premium. /it assumes that the increase in price of stock will be less than the premium received.

Naked Put is writing a put option. Under this this there is unlimited risk is the stock prices rises and limited profit in downside. It provides profit only in form of put premium. It assumes that the decrease in price of stock will be less than the premium received.

Both naked call and naked put is based on the rationale that profit can be earned without holding the actual asset.

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