What would the broker do about this naked call option?
The broker would give you a margin call and get you to deposit more funds into your account. They wouldn't wait for the stock price to reach $30, but would take this action much earlier. More over it is very unrealistic for any stock to go up 275% over a few hours, and if the stock was this volatile the broker would be asking for a higher margin to start with. What I am really worried about is that if there were any situation like this you are not considering what you would do as part of your risk management strategy. Before writing the option you should already have an exit point at which you would buy back the option to limit your losses. If the underlying is currently moving as aggressively as stated, the broker would immediately forcibly close positions to maintain margin.  What securities are in fact closed depends upon the internal algorithms. If the equity in the account remains negative after closing all positions if necessary, the owner of the account shall owe the broker the balance.  The broker will close the account and commence collections if the owner of the account does not pay the balance quickly. Sometimes, brokers will impose higher margin requirements than mandated to prevent the above eventuality. Brokers frequently close positions that violate internal or external margin requirements as soon as they are breached. Yes, it can buy back the call, but much before stock hits the $30 mark.   Let us say you got 1$ from selling the call. So the total money in your account is 4$ + 1 $ = 5 $. When stock hits 10$ (your strike), the maintenance margin is 5$. As soon as stock goes past 10, your maintenance margin is violated. So broker will buy back your call (at least IB does that, it does not wait for a margin call). Now if the stock gapped up from 8 to 30,then yes, broker will buy it back at 30, so your account will have a negative balance. Assume the call cost 20$ when stock hit 30, your balance is: 5 - (30-10) = -15. Depending on broker, I suppose they will ask you to bring your account balance back up to positive. If they don't do that, they risk going out of business.
If I sell a covered call, on stock I own 100%, there is no risk of a margin call. The stock goes to zero, I'm still not ask to send in more money. But, if bought on margin, margin rules apply.  A naked put would require you to be able to buy the stock if put to you. As the price of the stock drops, you still need to be able to buy it at the put strike price.  Mark to market is just an expression describing how your positions are considered each day. "Great answer by @duffbeer. Only thing to add is that the option itself becomes a tradeable asset. Here's my go at filling out the answer from @duffbeer. ""Hey kid... So you have this brand-new video game Manic Mazes that you paid $50 for on Jan 1st that you want to sell two months from now"" ""Yes, Mr. Video Game Broker, but I want to lock in a price so I know how much to save for a new Tickle Me Elmo for my baby sister."" ""Ok, for $3, I'll sell you a 'Put' option so you can sell the game to me for $40 in two months."" Kid says ""Ok!"", sends $3 to Mr Game Broker who sends our kid a piece of paper saying: The holder of this piece of paper can sell the game Manic Mazes to Mr Game Broker for $40 on March 1st. .... One month later .... News comes out that Manic Mazes is full of bugs, and the price in the shops is heavily discounted to $30. Mr Options Trader realizes that our kid holds a contract written by Mr Game Broker which effectively allows our kid to sell the game at $10 over the price of the new game, so maybe about $15 over the price in the second-hand market (which he reckons might be about $25 on March 1st). He calls up our kid. ""Hey kid, you know that Put option that Mr Game Broker sold to you you a month ago, wanna sell it to me for $13?"" (He wants to get it a couple of bucks cheaper than his $15 fair valuation.) Kid thinks:  hmmm ... that would be a $10 net profit for me on that Put Option, but I wouldn't be able to sell the game for $40 next month, I'd likely only get something like $25 for it. So I would kind-of be getting $10 now rather than potentially getting $12 in a month. Note: The $12 is because there could be $15 from exercising the put option (selling for $40 a game worth only $25 in the second-hand market) minus the original cost of $3 for the Put option. Kid likes the idea and replies: ""Done!"". Next day kid sends the Put option contract to Mr Options Trader and receives $13 in return. Our kid bought the Put option and later sold it for a profit, and all of this happened before the option reached its expiry date." "Unless you want to own the actual shares, you should simply sell the call option.By doing so you actual collect the profits (including any remaining time-value) of your position without ever needing to own the actual shares. Please be aware that you do not need to wait until maturity of the call option to sell it. Also the longer you wait, more and more of the time value embedded in the option's price will disappear which means your ""profit"" will go down." Here is the answer for #3 from my brokerage: Your math is correct. Typically, option traders never take delivery of the stock simply to then turn around and sell it at the higher price that the stock is trading at. You wold always expect the option to have a higher value that simply selling the stock at market price. There are many factors involved in options pricing and the math behind it is quite complicated, but unless it is right at expiration, the option will have a higher price than the stock itself. Good questions. I can only add that it may be valuable if the company is bought, they may buy the options. Happened to me in previous company. "If you own a stake large enough to do that, you became regulated - under Section 13(d) of the 1934 Act and Regulation (in case of US stock) and you became regulated. Restricting you from ""shocking"" market. Another thing is that your broker will probably not allow you to execute order like that - directed MKT order for such volume. And market is deeper than anyone could measure - darkpools and HFTs passively waiting for opportunities like that." You own the stock at $29.42 At $40, the stocks is called at $26. You can't add the call premium, as it's already accounted for. The trade is biased towards being bearish on the stock. (I edited and added the graph the evening I answered)  Not the pretiest graph, but you get the idea. With that $29.42 cost, you are in the money till about $30, then go negative until the most you lose is $3.42. You bought the right – but not the obligation – to buy a certain number of shares at $15 from  whomsoever sold you the option, and you paid a premium for it.  You can choose whether you want to buy the shares at $15 during the period agreed upon. If you call for the shares, the other guy has to sell the shares to you for $15 each, even if the market price is higher. You can then turn around and promptly resell the purchased shares at the higher market price. If the market price never rises above $15 at any time while the option is open, you still have the right to buy the shares for $15 if you choose to do so. Most rational people would let the option expire without exercising it, but this is not a legal requirement.  Doing things like buying shares at $15 when the market price is below $15 is perfectly legal; just not very savvy.  You cannot cancel the option in the sense of going to the seller of the option and demanding your premium money back because you don't  intend to exercise the option because the market price is below $15.  Of course, if the market price is above $15 and you tell the seller to cancel the contract, they will be happy to do so, since it lets them off the hook. They may or may not give you the premium back in this case. There is such a thing as a buy-write, which is buying a stock and writing a (covered) call simultaneously. But as far as I know brokers charge two commissions, one stock trade and one options trade so you're not going to save on commissions. I'd say yes, and hope that my anecdotal evidence serves as proof. My IRA is not a margin account. It can't be.  I attempt to create a covered call, buying a stock at say $20, and selling a call for $4, for net $16 cost. The account only had $1610 at the time, and the trades go through just fine. Yes, I needed to enter as a limit order, at the same time, a single order with the $16 debit limit.  If this is not enough proof, I'd be curious - why not? The option proceeds must clear, of course, which it does. Sounds like an illiquid option, if there are actually some bidders, market makers, then sell the option at market price (market sell order). If there are not market makers then place a really low limit sell order so that you can sit at the ask in the order book. A lot of time there is off-book liquidity, so there may be a party looking for buy liquidity. You can also exercise the option to book the loss (immediately selling the shares when they get delivered to you), if this is an American style option. But if the option is worthless then it is probably significantly underwater, and you'd end up losing a lot more as you'd buy the stock at the strike price but only be able to sell at its current market value. The loss could also be increased further if there are even MORE liquidity issues in the stock. You're correct. If you have no option position at execution then you carry no risk. Your risk is only based on the net number of options you're holding at execution. This is handled by your broker or clearinghouse. Pretend that you wrote 1000 options, (you're short the call) then you bought 1000 of the same option (bought to cover) ... you are now flat and have zero options exposure. Pretend you bought 1000 options (you're long the calls) then you sold 1000 of them (liquidated your long) ... you are now flat and have zero options exposure. Yes. There are levels of option trading permission. For example, I've never set myself up for naked put writing.  But, if you already have the call spread, buying back the shorted call will leave you with a long call. This wouldn't be an issue. As long as you have the cash/margin to buy back that higher strike call. Just so I'm clear- the end result is a long call, and you think the stock is going up. There is nothing wrong with that fundamentally.  Be aware though: That's a negative theta trade. This means if your stock doesn't increase in price during the remaining time to expiration of your call option, the option will lose some of its value every day. It may still lose some of its value every day, depending on how much the stock price increases. The value of the call option just goes down and down as it approaches maturity, even if the stock price stays about the same. Being long a call (or a put) is a tough way to make money in the options market.  I would suggest using an out-of-the-money butterfly spread. The potential returns are a bit less. However, this is a cheap positive theta trade so you avoid time decay on the value of the option. It would be nice if the broker could be instructed to clear out the position for you, but in my experience the broker will simply give you the shares that you can't afford, then freeze your account because you are over your margin limit, and issue a margin call. This happened to me recently because of a dumb mistake: options I paid $200 for and expected to expire worthless, ended up slightly ITM, so they were auto-exercised on Friday for about $20k, and my account was frozen (only able to close positions).  By the next Monday, market news had shifted the stock against me and I had to sell it at a loss of $1200 to meet the margin call.  This kind of thing is what gives option trading a reputation for danger: A supposedly max-$200-risk turned into a 6x greater loss.  I see no reason to ever exercise, I always try to close my positions, but these things can happen.