Naked Option
A short option position written without any offsetting position in the underlying asset, creating theoretically unlimited risk.
What is Naked Option?
A naked option — also called an uncovered option — is a short (sold) option position where the writer holds no offsetting position in the underlying asset to hedge the obligation. Writing a naked call on a stock means the seller must deliver shares if exercised, but owns none — exposing them to theoretically unlimited loss if the stock price surges. Writing a naked put obligates the seller to buy the underlying at the strike price; while the maximum loss is bounded (the stock can only fall to zero), it can still be substantial. Because of this risk, brokers require large margin deposits for naked option positions and generally restrict them to sophisticated traders with approved account levels. Naked calls are considered the most risky options strategy.
Example
A trader sells a naked call on a stock at a $150 strike, collecting $3.00 premium. If the stock unexpectedly jumps to $200 following an acquisition announcement, the trader must buy shares at $200 to deliver them at $150 — a $50 loss per share offset by the $3.00 premium, for a net loss of $47 per share or $4,700 per contract. The risk is theoretically unlimited if the stock continues to rise.