Why Is the Maximum Loss for an OTM Option Seller Theoretically Unlimited? ▴ Learn

Why Is the Maximum Loss for an OTM Option Seller Theoretically Unlimited?

The maximum loss for a naked OTM option seller is theoretically unlimited for a Call and substantial for a Put. For a short Call, if the underlying price rises indefinitely, the seller's obligation to sell at the lower strike price creates an ever-increasing loss.

For a short Put, the loss is limited by the underlying price falling to zero, which is still a substantial loss.

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