UK Accounting Glossary
A naked option is an option contract that creates potentially significant exposure because the option writer does not have an offsetting position. For instance, if an investor sells a call option for a stock without owning shares of that stock, the call is said to be a naked option. If the call option is exercised, the naked option writer must buy shares at the market price, no matter how high, then sell those shares at the strike price. This type of naked option is sometimes called an uncovered call. Similarly, the uncovered put is a naked option contract in which the writer does not have a short position in the asset. If the put is exercised, the writer of this naked option will be forced to buy shares for above market price. A naked option can be extremely profitable provided the price of the underlying moves in the right direction. Writing a naked option is an extremely speculative investment.
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This glossary post was last updated: 7th February 2020.