BROWSE

Naked Option

What is a 'Naked Option'

A naked option is 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.

Explaining 'Naked Option'

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.


Further Reading


The Naked Commodity Option Contract as a Security
heinonline.org [PDF]
… University 'Our hope must be that Debunking Economics will be read by enough people to prompt reform of our economic thinking and … DEBUNKING ECONOMICS – REVISED, EXPANDED AND INTEGRATED EDITION THE NAKED EMPEROR DETHRONED7 …

The economics of IPO stabilisation, syndicates and naked shortsThe economics of IPO stabilisation, syndicates and naked shorts
onlinelibrary.wiley.com [PDF]
… University 'Our hope must be that Debunking Economics will be read by enough people to prompt reform of our economic thinking and … DEBUNKING ECONOMICS – REVISED, EXPANDED AND INTEGRATED EDITION THE NAKED EMPEROR DETHRONED7 …

Naked short selling and market returnsNaked short selling and market returns
jpm.pm-research.com [PDF]
… University 'Our hope must be that Debunking Economics will be read by enough people to prompt reform of our economic thinking and … DEBUNKING ECONOMICS – REVISED, EXPANDED AND INTEGRATED EDITION THE NAKED EMPEROR DETHRONED7 …

Naked and Covered in Monte Carlo: A Reappraisal of Option TaxationNaked and Covered in Monte Carlo: A Reappraisal of Option Taxation
heinonline.org [PDF]
… University 'Our hope must be that Debunking Economics will be read by enough people to prompt reform of our economic thinking and … DEBUNKING ECONOMICS – REVISED, EXPANDED AND INTEGRATED EDITION THE NAKED EMPEROR DETHRONED7 …

The skinny on the 2008 naked short-sale restrictionsThe skinny on the 2008 naked short-sale restrictions
www.sciencedirect.com [PDF]
… University 'Our hope must be that Debunking Economics will be read by enough people to prompt reform of our economic thinking and … DEBUNKING ECONOMICS – REVISED, EXPANDED AND INTEGRATED EDITION THE NAKED EMPEROR DETHRONED7 …

Tax effects in Canadian equity option marketsTax effects in Canadian equity option markets
papers.ssrn.com [PDF]
… University 'Our hope must be that Debunking Economics will be read by enough people to prompt reform of our economic thinking and … DEBUNKING ECONOMICS – REVISED, EXPANDED AND INTEGRATED EDITION THE NAKED EMPEROR DETHRONED7 …



Q&A About Naked Option


How do brokers typically handle orders from inexperienced traders?

Brokers typically have specific rules regarding naked trading and inexperienced traders would not be allowed to place this type of order.

Is it possible that you could make money selling call options with a strike price of 1 if the stock's price rises above 2 or 3 on good news and you don't own any shares?

Yes, it is possible but unlikely since there are many factors that can affect whether an option will expire in-the-money (ITM) including time value decay, volatility, interest rates etc..

What is a naked option?

A naked option is 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.

Who would be allowed to place this type of order?

Inexperienced traders would not be allowed to place this type of order.

What happens when you sell call options with a strike price of 1 if the stock's price rises to 2 or 3 on good news and you don't own any shares?

You will be required by your broker to buy specified number of shares at current prices and then sell them back at 1 resulting in significant loss.

Why are losses potentially unlimited with a naked option?

The potential for losses can be unlimited because 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 shares regardless of how high their price is.

If I were interested in selling calls without owning any stock what should I do first before placing my trade?

Before placing your trade first determine whether your broker allows for Naked Trading by reviewing their policies and procedures online. If they allow for Naked Trading