uncovered option


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Naked Option

An option contract without another, opposite option hedging the risk. Unlike more complex spreads and straddles, which involve the purchase or sale of multiple options in order to profit in different ways, naked options are straightforward calls or puts. An investor with a naked option makes a profit or loss depending on the movement of the underlying asset. Naked options are also called uncovered options. See also: Covered options.

uncovered option

Uncovered option.

An uncovered option, also known as a naked option, is an option that is not backed by another position.

For example, if you sell a call option without owning the stock that you would have to deliver if the option holder exercised, the call is uncovered.

Similarly, if you sell an uncovered put, you don't have adequate cash in reserve to fulfill your obligation to purchase the underlying instrument at exercise.

Writing uncovered contracts can put you at significant risk despite the premium you collect when you open the position.

For example, if a naked call option were exercised and assigned to you, you would have to buy the underlying instrument at its market price to be able to meet the terms of the contract. Because of the potential risk, your brokerage firm may restrict your right to write uncovered positions or may require you to trade these options in a margin account.