Covered vs. Uncovered (Naked) Options
Chapters in this video
- 0:00 The highest-risk strategy on the SIE exam
- 0:52 Covered calls: income with a downside trap
- 2:06 Naked calls: unlimited risk explained
- 3:37 Cash-secured puts versus naked puts
- 5:14 Covered puts: why "covered" does not mean safe
- 6:00 Margin account rules for each strategy
- 6:55 Rapid-fire exam recap
What this video covers
- Why a covered call limits upside but does NOT eliminate downside risk on the underlying stock itself
- The exact max gain and max loss formulas for a covered call, and why the worst case is stock at zero
- Why a naked (uncovered) call carries unlimited maximum loss, and why it is the highest-risk options strategy on the exam
- How cash-secured puts differ from naked puts in capital backing, even though both share the same theoretical max loss formula
- Why a covered put is not safe despite the word "covered": it involves short stock, which means unlimited risk
- Why naked puts have defined risk (strike minus premium) while naked calls have unlimited risk, and how the exam baits you into confusing the two
- Which strategies require a margin account (naked calls and naked puts) versus which can be traded in a cash account (covered calls)
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