Short options
Why is selling naked calls on high-momentum momentum stocks considered a catastrophic risk?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
Selling naked calls on high-momentum stocks is considered especially risky because sharp upward moves, sometimes called short squeezes, can produce rapid, outsized losses with no cap, since the stock price theoretically has no upper limit.
How it works
Momentum stocks can experience rapid multi-day rallies driven by news, sentiment, or short covering, and naked call sellers must cover these moves at market prices regardless of how far above the strike the stock has moved.
An example
A trader who sold naked calls on a stock before an unexpected rally from $20 to $60 would face losses far exceeding the premium originally collected.
Risk & limitations
OCC disclosures specifically warn that uncovered call writing carries theoretically unlimited risk, which is amplified on volatile, high-momentum underlyings.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.