What does naked option mean?
Definitions for naked option
naked op·tion
This dictionary definitions page includes all the possible meanings, example usage and translations of the word naked option.
Princeton's WordNet
naked optionnoun
a put or call option for which the seller or buyer has no underlying security position
Wikipedia
Naked option
A naked option or uncovered option is an options contract where the option writer (i.e., the seller) does not hold the underlying security position to cover the contract in case of assignment (like in a covered option). Nor does the seller hold any option of the same class on the same underlying security that could protect against potential losses (like in an options spread). A naked option involving a "call" is called a "naked call" or "uncovered call", while one involving a "put" is a "naked put" or "uncovered put".The naked option is one of riskiest options strategies, and therefore most brokers restrict them to only those traders that have the highest options level approval and have a margin account. Naked option are attractive because the seller receives the premium cost of the option without buying a corresponding position to hedge against potential losses. In the case of a naked put, the seller hopes that the underlying equity or stock price stays the same or rises. In the case of a naked call, the seller hopes that the underlying equity or stock price stays the same or drops. And the seller's odds of retaining the premium at expiration increase the further the naked option is out of the money at the time it was written.Selling a naked option could also be used as an alternative to using a limit order or stop order to open an equity position. Instead of buying an underlying stock outright, one with sufficient cash could sell a put option, receive the premium, and then buy the stock if its price drops to or below the strike price at assignment or expiration. Likewise, one with sufficient equity to borrow on margin could sell a call option, receive the premium, and then short the stock if its price rises to or above the strike price at assignment or expiration. However, the naked option has the highest risk because sellers have agreed to cover the contract in case of assignment, no matter how far the price of the stock goes. The seller of a naked put would be obligated to purchase the underlying stock at the strike price even if its market price drops down to zero. Likewise, the seller of a naked call could be forced to short the underlying stock at the strike price even if its market price rises up to an unlimited amount. Because nothing is covered to protect against potential losses, a margin call would be triggered if the seller does not have enough equity or cash to cover the contract in case of assignment.
ChatGPT
naked option
A naked option is a type of investment strategy in which an investor sells or writes options without any underlying position in the security. These options are thus "naked" because they are exposed to significant risk, as there isn't any protection against unfavorable movements in the underlying security. Naked options can be a risky strategy but can also provide significant gains if the market moves in the investor's favor. It can be in the form of a call (the right to buy) or put (the right to sell) options.
Matched Categories
Numerology
Chaldean Numerology
The numerical value of naked option in Chaldean Numerology is: 4
Pythagorean Numerology
The numerical value of naked option in Pythagorean Numerology is: 7
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"naked option." Definitions.net. STANDS4 LLC, 2024. Web. 25 Apr. 2024. <https://www.definitions.net/definition/naked+option>.
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