What it is
You sell a call on a stock you do not hold. The premium is yours straight away. If the stock ends below the strike the call expires and that is the whole result; if it ends above, you owe 100 shares at the strike, which you would have to buy at the market price to deliver.
Uncovered is the entire difference between this and a covered call. Owning the shares turns a rally into a missed gain. Without them, the rally becomes a loss, and since a stock price has no upper limit, neither does the loss.
What has to happen for it to make money
The stock has to stay under the strike plus the premium. Below the strike the premium is kept in full, whether the stock drifts down, sits flat, or crashes. Above the break-even, the loss grows by a dollar a share for every dollar the stock climbs.
It is a bearish-to-neutral bet that pays a small, fixed amount. Calmer markets help before expiry, since the call costs less to buy back.
Once it is on
Brokers usually reserve this for their highest options level and hold substantial margin against it, which they can raise as the stock rises. Anyone holding one generally decides in advance at what price they will buy it back, because a loss that has no ceiling also has no natural place to stop.
An in-the-money call can be assigned early, especially just before an ex-dividend date, leaving you short 100 shares and owing the dividend.
What goes wrong
A sudden rally. Takeover bids, short squeezes and surprise results can lift a stock by a large fraction overnight, and a naked call has no limit on how much that costs. Those moves often arrive with no chance to act in between, so a planned exit price is not a guaranteed one.
Margin calls during the rise. As the stock climbs the broker asks for more collateral, and an account that cannot supply it is closed out at whatever the price is at that moment.
Pros and cons
- Pro: paid by a falling, flat or slightly rising stock.
- Pro: no shares or cash outlay to open.
- Pro: time decay works for it every day.
- Con: the loss has no upper limit.
- Con: the most it can make is a small premium.
- Con: heavy, moving margin, and the top approval level.
In Restrike
The Portfolio marks a short call as uncovered when the shares do not cover it, and its payoff card says in words that the loss has no floor. The margin cushion charges it in full. Imported read-only from your broker; Restrike never places a trade.