naked option
American Heritage Dictionary:
Top
naked option
n.
An opening transaction in an option when the underlying asset is not owned by the investor writing the option. If a stock on which such an investor has written a call option is then called by the option holder, the investor must purchase shares in the market for delivery and is therefore caught naked. Also called uncovered option.
Barron's Finance & Investment Dictionary:
Top
naked option
option for which the buyer or seller has no underlying security position. A writer of a naked call option, therefore, does not own a long position in the stock on which the call has been written. Similarly, the writer of a naked put option does not have a Short Position in the stock on which the put has been written. Naked options are very risky—although potentially very rewarding. If the underlying stock or stock index moves in the direction sought by the investor, profits can be enormous, because the investor would only have had to put down a small amount of money to reap a large return. On the other hand, if the stock moved in the opposite direction, the writer of the naked option could be subject to huge losses.
For instance, if someone wrote a naked call option at $60 a share on XYZ stock without owning the shares, and if the stock rose to $70 a share, the writer of the option would have to deliver XYZ shares to the call buyer at $60 a share. In order to acquire those shares, he or she would have to go into the market and buy them for $70 a share, sustaining a $10-a-share loss on his or her position. If, on the other hand, the option writer already owned XYZ shares when writing the option, he or she could just turn those shares over to the option buyer.
This latter strategy is known as writing a covered call.
For instance, if someone wrote a naked call option at $60 a share on XYZ stock without owning the shares, and if the stock rose to $70 a share, the writer of the option would have to deliver XYZ shares to the call buyer at $60 a share. In order to acquire those shares, he or she would have to go into the market and buy them for $70 a share, sustaining a $10-a-share loss on his or her position. If, on the other hand, the option writer already owned XYZ shares when writing the option, he or she could just turn those shares over to the option buyer.
This latter strategy is known as writing a covered call.
| NET, NEO | |
| Naked Position, Naked Short |
Investopedia Financial Dictionary:
Top
Naked Option
An option position where the buyer or seller has no underlying security position.
Investopedia Says:
Naked options are very risky. Profits are huge if the underlying asset moves in the direction desired by the investor. On the other hand, a writer of a naked option can lose big if the underlying asset moves in the opposite direction.
Related Links:
Learn about this aggressive trading strategy that can be used to generate income as part of a diversified portfolio. Peekaboo! Call Writing Gets Naked
Compare naked strategies to credit spreads and see if the unlimited risk of going naked is worth it. Should Your Options Go Naked?
Find out why these enticing options can spell trouble for your bottom line. Naked Options Expose You To Risk
An introduction to the world of options, covering everything from primary concepts to how options work and why you might use them. Options Basics Tutorial
Post a question - any question - to the WikiAnswers community:
Copyrights:
American Heritage Dictionary
The American Heritage® Dictionary of the English Language, Fourth Edition Copyright © 2007, 2000 by Houghton Mifflin Company. Updated in 2009. Published by Houghton Mifflin Company. All rights reserved.
Read more
Barron's Finance & Investment Dictionary
Dictionary of Finance and Investment Terms. Copyright © 2010 by Barron's Educational Series, Inc. All rights reserved.
Read more
Mentioned in
Naked Writer
(finance term)
Writing Naked
(business term)
Covered Option
(business term)
Uncovered Option
(finance term)
Naked Position
(in banking)
» More