Naked option
Also known as: uncovered option
A naked option is an option a trader sells without owning an offsetting position in the underlying or any other hedge to limit the loss. A naked call is written without owning the underlying shares, and a naked put is written without setting aside the cash or a matching hedge to cover the obligation to buy the if assigned. This contrasts with a , where the seller already owns the shares being called away.
Selling a naked call carries theoretically unlimited risk, because the price can keep rising with no ceiling, and the seller must deliver shares at the regardless of how high the market has gone. Selling a naked put has a large but bounded risk, since the can only fall to zero, but that still means being forced to buy shares at the far above where the is trading if it collapses. In both cases the premium collected upfront is the entire potential profit, while the potential loss is far larger.
Because of this lopsided risk profile, require substantial margin to open a naked option position and typically restrict the strategy to accounts approved for higher levels of . Naked options are popular among traders looking to generate income from when they believe a large move is unlikely, but a single sharp move against the position can produce losses well beyond the premium received, which is why the strategy is generally left to experienced traders comfortable managing that risk actively.