A position with no long option capping its loss, so the worst case is limited only by how far the underlying can move.
Naked short options, short straddles and short strangles are undefined risk. Short puts are bounded by the underlying going to zero; short calls are theoretically unbounded.
These positions collect more premium and use more capital, and they are why risk-of-ruin conversations exist in options. The loss distribution has a fat tail, so back-tested averages understate the damage a single event can do.
Example: sell the XYZ $55 call for $0.80, collecting $80. XYZ receives a takeover bid at $78 overnight. The call is worth $23.00 and the loss is $2,220 — nearly 28 times the premium collected, from one headline, with no chance to manage it.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.Long straddle: payoff at expiry. A 100 call and a 100 put bought together for 8 make a V. A quiet market that ends near 100 costs the whole 8; the position only turns positive once the price finishes below 92 or above 108, whichever way it goes.
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