Skip to main content

Maximizing Profits: Naked Calls vs. Covered Calls

Brandon Ly

πŸ”₯ If you're looking for a way to earn extra income, selling call options can be a powerful strategy. But beware: selling naked calls can be risky. Here's what you need to know.

Naked Calls

πŸ’° Selling call options gives you the ability to earn premium income. But if you sell a naked (unhedged) call, you're taking on unlimited risk since you're obligated to sell the underlying asset at a preferential price if the buyer exercises the option.


Covered Calls

πŸ€” So what's the alternative? You can sell covered calls, which involves selling call options on an asset you already own. In TradFi, this is considered "safer" since:

  • Downside is NOT unlimited (but still substantial)
  • Markets tend to go up (this is a bullish strategy)

The payoff of selling a covered call is the same as a naked put. (Bonus point: covered call = naked put = Uniswap LP 🀯)


Backtest Strategy

πŸ” To figure out which strategy is right for you, it's important to backtest and analyze past data. Let's analyze what periodically selling naked ATM ETH calls over the last 2 years might look like!

Anyone will be able to sell options on Panoptic for any asset at any strike. Panoptic options even have an "effective Time To Expiration"πŸ‘‡ This means you can customize your Panoption to sell "dailies", "weeklies", and "monthlies". Let's backtest these 3 strategies!

Backtest #1: Selling (naked) calls on ETH every week

  • Earned 126% in premia
  • Lost 132% from calls being exercised

β†’ Total PnL: -6%

(Compare to ETH HODL: -32%)


Unfortunately, our strategy wasn't profitable. What if we tried different rebalancing periods?

Backtest #2: Selling (naked) calls on ETH every day/week/month

  • Weeklies: -6%
  • Monthlies: -28%
  • Dailies: -57%


Wow...dailies & monthlies did even worse. Let's try something typically seen as "less risky" β€” covered calls!

Backtest #3: Naked calls vs. covered calls

  • Naked calls: -6%
  • Covered calls: +6%

(The fact that they are exactly opposite is a coincidence.)


Covered calls did better...but why?

Notice how naked calls (blue curve) performed great in May 2022 β€” during the Terra collapse and bear market!


  • Bull market β†’ naked calls πŸ‘Ž
  • Bear market β†’ naked calls πŸš€

Let's test this out on one of the biggest bear markets: the UNI-ETH price!


In the spot markets, UNI has massively underperformed ETH. That makes the UNI-ETH price a bear market. So what happens if you sell naked calls on UNI-ETH? Answer:

  • 😎 Dailies: +55%
  • πŸ˜„ Weeklies: +54%
  • πŸ™‚ Monthlies: +38%



  • Naked calls have unlimited risk
  • Naked calls are bearish and do well in 🐻 markets
  • Covered calls are bullish and do well in πŸ‚ markets


  • β›½ Ignores gas/swap fees/commission
  • πŸ’² Assumes premia = LP fees
  • ❓ This is hypothetical β€” you can't sell calls on Uniswap (Panoptic soon 🀫)


  • πŸ“’ None of this should be taken as financial advice.
  • ⚠️ Past performance is no guarantee of future results!