Definition of Naked option:
A naked position refers to a situation in which a trader sells an option contract without holding a position in the underlying security as protection from an adverse shift in price. Naked options are attractive to traders and investors because they have the expected volatility built into the price. If the underlying security moves in the opposite direction that the option buyer anticipated, or even if it moves in the buyer's favor but not enough to account for the volatility already built into the price, then the seller of the option gets to keep any out of the money premium. That typically means that option sellers win around 70 percent of trades. A setup that appeals to traders and investors who like to win the majority of their trades.
Uncovered option for which the buyer or seller does not own the underlying asset. It is either a long position by the writer of a call option (right to buy) or a short position by the writer of a put option (right to sell). Naked options carry a chance of huge profit as well as of great risk, depending on the markets direction. Opposite of covered option. Also called uncovered option.
A naked option, also known as an "uncovered" option, is created when the seller of an option contract does not own the underlying security needed to meet the potential obligation that results from selling (also known as "writing" or "shorting") an option. Selling an option creates an the obligation of the seller to provide the option buyer with the underlying shares or futures contract for a corresponding long position (for a call option) or the cash necessary for a corresponding short position (for a put option) at expiration. If the seller has no ownership of the underlying asset or the corresponding cash necessary for execution of a put option, then the seller will need to acquire it at expiration based on current market prices. With no protection from the price volatility, such positions are considered highly vulnerable to loss and thus referred to as uncovered, or more colloquially, as naked.
How to use Naked option in a sentence?
- Naked options refer to an option sold without any previously set-aside shares or cash to fulfill the option obligation at expiration.
- Naked put options that are exercised create a long position in the seller's account, purchased with available cash.
- Naked call options that are exercised create a short position in the seller's account.
- Naked options run the risk of large loss from rapid price change before expiration.
Meaning of Naked option & Naked option Definition