The term naked call refers to a strategy in which the seller of a call option does not own the underlying securities outlined in the contract. Naked calls are considered an advanced options strategy, since it carries unlimited risk.
The seller of a call option is referred to as the writer. They are obligated to sell the securities to the holder of the call option if they exercise their right. The buyer of a call pays a fee, known as a premium, to own the right to exercise their option. If the seller of a call does not own a corresponding amount of the underlying security, the option is said to be "naked," which means the seller will have to purchase shares on the open market if the buyer decides to exercise their option.
Generally, the buyer of a call option is bullish on the security, since they believe its price will increase over time. The writer of the option has a bearish, or neutral, view in the case of a covered call. A naked call is one of the riskiest options an investor can write because it carries unlimited risk (in theory).
There are two possible outcomes when writing a naked call: