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Overview
Selling an uncovered option (also known as a "naked" option) is an advanced strategy where you sell a call or put option contract to collect a premium, without holding the full collateral to cover a potential assignment.
- Selling a short uncovered call means you're obligated to sell a stock you don't own at a specific price.
- Selling a short uncovered put means you're obligated to buy a stock at a specific price without having the full cash amount set aside.
This strategy is generally used by experienced investors to generate income from premiums.
Eligibility requirements
To trade uncovered short options, you must meet the following criteria:
- You must have a margin account. This strategy isn't available in registered accounts (like a TFSA or RRSP).
- You must apply for and be approved for our highest level of options trading.
How to enable uncovered options
Follow these steps on the web to enable uncovered options:
- Log in to your Wealthsimple profile
- Select the Profile icon in the bottom left corner
- Select Settings
- On the settings page, select Options
- Next to Uncovered options, select Turn on
- Follow the on-screen prompts to complete the process
Margin requirements for uncovered options
"Uncovered" doesn't mean zero collateral is required. It simply means the position isn't fully secured by cash or the underlying stock. Instead, when you sell an uncovered option, a portion of your account's buying power is held as collateral and remains unusable for as long as the position is open.
How to "sell to open" an uncovered option
Follow these steps to sell an uncovered option:
- Log in to the Wealthsimple app
- Tap the Search icon at the bottom of the screen
- Use the search bar to find the stock you want to trade options on
- Tap Trade, then select Trade options
- Select either Call or Put and choose your desired expiration date
- From the options chain, choose a strike price and tap the price in the Bid (Sell) column
- Enter the number of contracts you want to sell and the limit price
- Choose your margin account and tap Review
- Review your order details and tap Place order
- Log in to your Wealthsimple profile
- Select the Search icon at the top left of the screen
- Use the search bar to find the stock you want to trade options on
- Select the Options tab to view available contracts
- Select either Call or Put and choose your desired expiration date
- From the options chain, choose a strike price and select the price in the Bid (Sell) column
- Enter the number of contracts you want to sell and the limit price
- Choose your margin account and select Review
- Review your order details and select Place order
How to "buy to close" a short position
Follow these steps to buy to close a short option:
- Log in to the Wealthsimple app
- From the Home tab, navigate to your holdings
- Tap the short option position you wish to close
- Tap the Close button at the bottom of your screen
- Choose your desired order type from the Order type menu
- Enter the required fields for the order type
- Choose your desired account and tap Review
- Review your order details and tap Place order
- Log in to your Wealthsimple profile
- From the Home page, scroll down to Holdings
- Select the contract you'd like to buy to close
- On the right side of the screen, select the Buy tab
- Choose your desired buy type from the Order type menu
- Enter the required fields for the buy type
- Choose your desired account and select Review
- Review your order details and select Place order
Risks and considerations
When you sell an uncovered option, consider the following:
- Your loss potential on short calls is theoretically unlimited. If a stock rises sharply, a sudden move from unexpected news or earnings can result in losses that far exceed the premium you collected.
- Your option can be assigned at any time before it expires. If it's in-the-money, you may have to sell shares (for calls) or buy them (for puts) at the strike price, regardless of the current market price.
- Margin requirements can change. If a position moves against you, you may need to reserve more buying power to keep it. This means you might need to deposit more funds or close the position at a loss, potentially triggering a margin call at any time.
- Volatility can work against you. If volatility rises, the price of the options you sold will increase, and you'll see unrealized losses even if the stock hasn't moved.
Options trading fees
Wealthsimple has a $0 per-contract fee on all successful buy and sell orders. Learn more about options trading fees and taxes.
Frequently asked questions
What do I need to know about "uncovered" or "naked" options?
This means you're selling an option contract without holding the full corresponding collateral. For example, you're selling a call option without owning the 100 underlying shares.
Can my margin requirement change while my position is open?
Yes. The buying power held as collateral for an uncovered option is dynamic and will change as market conditions change. This means a position can move against you and trigger a margin call at any time.
What happens if my uncovered option is assigned?
The outcome depends on whether it's a put or call:
- Short put: If assigned, you're obligated to buy 100 shares of the stock at the strike price. Your account's buying power that was held as collateral is sufficient to support this purchase.
- Short call: Because our platform doesn't support shorting stocks, we'll automatically buy to close any uncovered short call positions that are in-the-money before they can be assigned at expiration.
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