naked option

Naked Option

An option position where the buyer or seller has no underlying security position.

Notes:

Naked options are very risky. Profits are huge if the underlying asset moves in the direction desired by the investor. On the other hand, a writer of a naked option can lose big if the underlying asset moves in the opposite direction.

See also: Call Option, Naked Call, Naked Position, Naked Shorting

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naked option

An opening transaction in an option when the underlying asset is not owned. An investor writing a call option on 100 shares of IBM without owning the stock is writing a naked option. If the stock is called by the option holder, the writer must purchase shares in the market for delivery and is therefore caught naked. Also called uncovered option. Compare covered call option.