uncovered option

Uncovered option, also known as a naked 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 uncovered option, the seller must purchase the shares and sell them under the terms of the option contract.

There are two uncovered options: 

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

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

[Last reviewed in April of 2026 by the Wex Definitions Team] 

Keywords

• llcs-corporations-partnerships

Wex

• COMMERCE
• commercial activities
• securities
• wex definitions
• commercial transactions