Let's say that I sell covered calls and they are purchased by Alice. Later, I buy these calls (which were written by Bob) to close my position. Let's say that Bob's short calls were naked.

Suppose Alice exercises her long calls and Bob defaults on them. Do I have any risk in this case? Or am I in the clear once I buy my calls back? Does the situation change if I wrote naked calls?

1 Answer 1


If you sell a short call to open (covered or naked) and Alice buys to open that call, you are short that call and Alice is long that call.

If you buy to close your call from Bob and he sold that call to open (naked), you no longer have an option position or option involvement whatsoever. Bob (short) is now the counter party to Alice (long).

If Bob defaults, Alice has no problem since the Option Clearing Corp guarantees option contracts. Bob and his broker have the problem. To minimize the risk of default, naked options have a margin requirement and brokers have computer algorithms that monitor the margin level at all times. If you violate the minimum margin requirement, the broker will close your position ASAP.


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