An option whose buyer or seller has no position in the underlying security. It is a short call or short put for which there is not opposite position to limit potential losses. When an investor owns underlying asset and at the same time has an option position on that asset, the option is said to be covered. The risk of a naked option substantially exceeds that of a covered option. It is true that only little initial investment is required for naked options, but the risks are virtually unlimited.
In general, the term “naked” refers to writing options without purchasing or owning the underlying asset. This is analogous to selling a stock short in anticipation of a fall in the stock price.
It is also known as an uncovered option.
Comments