When to use it?
Very rarely. Only if: you are absolutely convinced the stock will fall or stall over the period, your account is very well capitalized to absorb a short squeeze, AND your broker has approved you at level 4. For most traders, prefer a bear put spread (limited loss).
When to avoid it?
Always, for 99% of retail investors. A short squeeze can multiply the loss 10× in a few days (see GME January 2021, where shorts lost billions). If you want to play bearish, buy a long put or build a bear put spread.
How it works
You SELL 1 call contract = the obligation to sell 100 shares at the strike if exercised. You collect the premium × 100. BUT you do not own the shares.
At expiration:
• Stock BELOW the strike: the call expires OTM, you keep the premium. Max profit.
• Stock ABOVE the strike: you MUST deliver 100 shares at the strike. Since you do not have them, you must buy them at the current market. Loss = (price − strike − premium) × 100, with no upper limit.
If the stock is at $500 and your strike is 105: you must buy at 500 and sell at 105. Loss = (500 − 105 − premium) × 100 = nearly $40,000.
Why the risk is unlimited (and why it truly matters)
A stock can theoretically rise to infinity. So your loss is also theoretically infinite.
Real-world horror stories:
• GameStop (GME) January 2021: from $20 to $483 in 3 weeks. Short sellers lost ~$6 billion. Several hedge funds (Melvin Capital, Citron Research) shut down.
• Volkswagen 2008: from €200 to €1,005 in 2 days. Briefly became the world's largest market cap because of the short squeeze.
• AMC 2021: from $5 to $72 in a few months.
If you had sold 10 naked GME contracts at strike 25 for $100 each (total premium $1,000) and GME rose to $400, your loss = (400 − 25 − 1) × 1,000 = $374,000. For an initial credit of $1,000.
The lesson: NEVER write a naked short call on a stock with high short interest or squeeze potential.
Healthy alternatives
If your thesis is bearish, here are LIMITED-loss alternatives:
1. **Long Put**: you pay a premium, max loss = premium paid. See the Long Put page.
2. **Bear Put Spread**: you buy a put near the price + sell a put further OTM. Reduces the cost but also caps the gain. Max loss = difference in premiums × 100.
3. **Bear Call Spread**: you sell an ATM call and buy a call further OTM. Generates a credit, max loss = (higher strike − lower strike − credit) × 100. This is the HEALTHY version of the short call.
4. **Covered Call**: if you already hold the 100 shares, the call is covered. Loss if the stock rises = opportunity cost, not an outright loss.
In 5 minutes, you can build a bear call spread with risk limited to $300 instead of a naked call with $30,000 of risk.
Approval level required
Level 4 at most brokers (the highest). Requires:
• A margin account with significant capital (often $25,000+ mandatory for the pattern day trader, but here typically $50,000+).
• Documented options experience.
• Explicit understanding of the unlimited risk.
Wealthsimple does not allow the naked short call. Questrade and IBKR require manual approval.
Polaris Trader (Q3 2026) **will not enable** the naked short call by default — an additional signature acknowledging the unlimited risk will be required.
⚠ AMF disclaimer
Options are high-risk derivative products. Losses can exceed the capital initially committed (particularly for uncovered short positions). Polaris provides educational content only — this is not investment advice. Consult a registered advisor (AMF) before any decision and make sure you have the appropriate level of approval from your broker.