Naked Option

A trading position where the seller of an option contract does not own any, or enough, of the underlying security to act as protection against adverse price movements. If the price of the underlying security moves against the trader, who does not already own the underlying security, he or she would be required to purchase the shares regardless of how high the price is. The potential for losses, then, can be unlimited, and as a result, brokers typically have specific rules regarding naked trading. Inexperienced traders, for example, would not be allowed to place this type of order.

Naked trading is considered very risky since losses can be significant. An options trader could sell, for example, call options with a strike price of $10. If the stock's price rises to $20 or $30 on good news, and the option is naked (the seller does not own the underlying stock). He or she would be required to buy the specified number of shares at the current price, and sell them to the option buyer for the $10, resulting in a significant loss.

Investment dictionary. . 2012.

Look at other dictionaries:

  • naked option — see option 3 Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. naked option …   Law dictionary

  • naked option —    An opportunity to buy shares (at a fixed price) in which the seller of the option does not already own the shares. The seller hopes to buy back the option before it is exercised and so avoid having to supply the shares. If the buyer wants to… …   Business law dictionary

  • naked option — noun a put or call option for which the seller or buyer has no underlying security position • Hypernyms: ↑option …   Useful english dictionary

  • naked option — Fin an option in which the underlying asset is not owned by the seller, who risks considerable loss if the price of the asset falls …   The ultimate business dictionary

  • naked option strategies — An unhedged strategy making exclusive use of one of the following: short call strategy (selling or writing call options), and short put strategy (selling or writing put options). By themselves, these positions are called naked strategies because… …   Financial and business terms

  • Naked option strategies — An unhedged strategy making exclusive use of one of the following: Long call strategy (buying call options ), short call strategy (selling or writing call options), Long put strategy (buying put options ), and short put strategy (selling or… …   Financial and business terms

  • naked option position — An open options contract that is not covered by an offsetting position in the underlying futures commodity or by another options contract against which it can be spread. Chicago Mercantile Exchange Glossary …   Financial and business terms

  • option — op·tion 1 / äp shən/ n 1: the power or right to choose; also: a choice made or available 2: a privilege of demanding fulfillment of a contract on any day within a specified time 3: a contract conveying in exchange for the payment of a premium a… …   Law dictionary

  • naked — Bare; wanting in necessary conditions; incomplete, as a naked contract (nudum pactum), i.e., a contract devoid of consideration, and therefore invalid; or, simple, unilateral, comprising but a single element, as a naked authority, i.e., one which …   Black's law dictionary

  • Naked Juice — Type Drinks Owner PepsiCo Country …   Wikipedia

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