Naked Option
Quick Definition
An option sold without holding the underlying asset or an offsetting position, exposing the seller to theoretically unlimited risk.
What Is Naked Option?
A naked (or uncovered) option is a short option position where the seller does not own the underlying asset (for calls) or does not have cash set aside to buy (for puts). Selling naked calls is considered one of the riskiest options strategies because the potential loss is theoretically unlimited — if the stock rises dramatically, the call seller must buy shares at the market price to deliver at the lower strike. Naked puts have risk limited to the strike price minus premium received (if the stock goes to zero). Due to the high risk, naked option selling requires the highest options approval level (typically Level 4 or 5) and substantial margin requirements. Despite the risks, experienced traders sell naked options to collect premium, often managing risk through position sizing, stop-losses, and diversification across many positions.
Naked Option Example
- 1A trader sells a naked $50 call for $2. If the stock surges to $100, the loss is $48 per share ($50 intrinsic value minus $2 premium) — $4,800 per contract
- 2Selling naked puts on high-quality stocks: sell the $140 put on AAPL for $3 with no offsetting position — max loss is $13,700 per contract if AAPL goes to zero
Related Terms
Covered Call
An options strategy where an investor sells call options against shares they already own, generating income from the premium while capping upside potential.
Cash-Secured Put
An options strategy where a trader sells a put option while holding enough cash to purchase the underlying stock if assigned.
Options Assignment
The process by which an option seller is obligated to fulfill the terms of the contract when the buyer exercises their right.
Short Call
Selling a call option to collect premium, obligating the seller to deliver shares at the strike price if assigned, with theoretically unlimited risk if uncovered.
Short Put
Selling a put option to collect premium, obligating the seller to buy shares at the strike price if assigned, with risk down to the stock reaching zero.
Call Option
A contract giving the holder the right, but not the obligation, to buy an underlying asset at a specified price within a specified time period.
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