naked option

A naked option, also known as an "uncovered option," is an option contract entered into where the seller does not actually own any, or enough, of the underlying stock . When the buyer exercises the option, the seller must purchase the shares and sell them under the terms of the option contract.

There are two naked options:

  • Naked call option: M aking a short position in the seller's account.
  • Naked put option: M aking a long position in the seller's account, purchased with available cash.

Traders and investors prefer naked options because the predicted volatility is already factored into the price. However, there is a risk of large loss if the price changes dramatically before expiration.

[Last reviewed in March of 2022 by the Wex Definitions Team ]

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