naked 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.

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.

Naked option.

When you write, or sell, a call option but don't own the underlying instrument, such as a stock in the case of an equity option, the option is described as naked.

Similarly, you write a naked put if you don't have enough cash on hand or in liquid investments to purchase the underlying instrument.

Because you collect a premium when you sell the option, you may make a profit if the underlying instrument performs as you expect, and the option isn't exercised.

The risk you run, however, is that the option holder will exercise the option. In the case of a call, you'll then have to buy the instrument at the market price in order to meet your obligation to sell. Or, if it's a put, you'll have to come up with the cash to purchase the instrument.

If that price of the underlying has moved in the opposite direction from the one you expected, meeting your obligation could result in a substantial net loss. Because of this risk, your brokerage firm may limit your right to write naked options or require that you write them in a margin account.

References in classic literature ?
He worked artfully, loosing slide after slide of the red soil and sending it streaming down and covering up all he had uncovered, hiding from the light of day the treasure he had discovered.
Before long we had uncovered many other indications that a great battle had been fought upon the ground where we stood.
Barbicane and his two companions immediately rushed to the uncovered window.
He succeeded; and through the uncovered glass the moon filled the projectile with a brilliant light.
Graham darted upon me - her neck uncovered, her black locks streaming in the wind.
Hastening forward, he placed himself behind a projection in the wall, so as to see the person pass across the stream of light from the uncovered window of the room that he had left.
His hat, tilted back, uncovered a good deal of forehead, which appeared very white in the dusk.
An inward laugh of derision uncovered not only his teeth but his gums as well, shook him all over, without the slightest sound.
Waterloo Uncovered, a landmark archaeological project to explore the battlefield of Waterloo, was launched today.
Caption: PIPE--Archaeologists have uncovered a 5,000-year-old water pipe system near the border with Iraq.
Israeli archeologists have uncovered ruins of biblical proportions.
Baghdad (NINA) - Interior Ministry announced that weapons and explosives uncovered in various parts of Baghdad.