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Intermediate · Lesson 5 of 6The Vestora safety rule and why naked selling hurts
Vestora only ever points to option positions where the most you can lose is the money you put in, with no margin calls or top-ups. That includes buying calls or puts, debit spreads, and covered calls on shares you own outright.
Selling naked calls has unlimited risk: if the share doubles overnight on a takeover, the writer must buy shares at the market price to deliver them. Selling naked puts can cost almost the full strike value in a crash. Several high-profile traders and funds have been wiped out by short volatility positions, for example the February 2018 "Volmageddon" collapse of short-VIX products.
Most retail option buyers lose money, mainly through time decay and buying overpriced short-dated options. Treat options first as a tool for insurance and income, not lottery tickets.
Key takeaways
- Only use positions whose max loss is known and fully paid.
- Naked calls = unlimited risk; naked puts = large risk.
- Short-dated option buying loses to time decay more often than not.
Check your understanding
1. Which position has unlimited loss potential?
- Long call
- Long put
- Naked short call
- Covered call
Show the answer
Naked short call. The share price has no upper limit.
2. What happened in "Volmageddon" (Feb 2018)?
- Gold doubled
- Short-volatility products collapsed when volatility spiked
- Bitcoin was invented
- Options were banned
Show the answer
Short-volatility products collapsed when volatility spiked. Products betting on calm markets lost most of their value in a day.
Go deeper
- Wikipedia: Naked call
- YouTube videos: naked options risk explained
- Investopedia: naked call
- ASIC: options risks
Practise this in Vestora
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Open the app freeGeneral education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.