We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is an Uncovered Call?

Malcolm Tatum
By
Updated: May 17, 2024
Views: 6,752
Share

Uncovered calls is a situation in which the writer of the call has established a reasonable margin with a broker to ensure that the stocks associated with the call can be purchased is the call is assigned. The uncovered call is often referred to as a naked call, partially due to the way this assurance is created. An uncovered call is not backed with cash assets, which would be the case with a covered call. Instead, it is backed with the margin extended by the broker to the investor.

The structure of an uncovered call is essentially a short call option position that is assured by the working arrangement with the broker, and the broker’s estimation of how much of a margin the investor can reasonably afford to carry. When the short put call option positions function according to expectations, the investor stands to realize a substantial amount of return from the call. However, an uncovered call also carries an almost unlimited degree of risk.

Just about the only mitigating factor that does place a limit on the potential for loss with an uncovered call is the amount of margin the broker is willing to extend. However, it is important to understand that a margin is not the same as a credit line. There is rarely any type of agreement in place that will allow the investor to pay off any amount of indebtedness over time. However, it is true that the amount of debt that can result from a bad uncovered call will be less if the margin extended by the broker is smaller. However, it is important to realize that the total indebtedness can still be substantial.

Some investors that choose to engage in an uncovered call from time to time will maintain control of cash assets that can quickly be called upon in the event the call does not work out. These cash assets are usually not associated with the brokerage account and may include funds in bank accounts or other investments that can quickly be liquidated and the proceeds used to settle the debt accrued on the margin.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Editors' Picks

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.wisegeek.net/what-is-an-uncovered-call.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.