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What is the difference between a naked call option and a covered call option? Which one...

What is the difference between a naked call option and a covered call option? Which one is riskier and why?

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Answer #1

A naked call option is when the call writer enters into the contract without actually holding the asset. Hence, a naked call option is considered to be more risky as compared to a covered call option.

Covered call option is where the call option writer has the underlying asset with him while entering into the contract. As the writer already has the asset, this type of an option is considered to be less risky than a naked call option. Covered call option has a lower probability of default because of the availability of the underlying asset with the call writer.

Do let me know in the comment section in case of any doubt.

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