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Naked (uncovered) option

A short option with no offsetting stock or option behind it — large or unlimited risk, needing the highest approval level.

A naked (or uncovered) option is one you sell without holding a position that offsets the risk. Selling a naked call means you have no shares to deliver if the buyer exercises; selling a naked put means you have no cash set aside to buy the shares. You collect the premium up front, and your whole thesis is that the option expires worthless so you keep it.

Say a stock trades at $50 and you sell a naked call at the $55 strike for $1.20. If the stock stays below $55, you pocket $120 per contract. But there's no upper bound on a call, so if the stock jumps to $80, you're forced to deliver shares you don't own and eat the difference. A naked put caps the loss at the strike falling to zero, but that can still be brutal on a leveraged account.

The common mistake is treating the premium as easy income and ignoring the tail. Brokers demand large margin for a reason. Most traders sell spreads instead, buying a further-out option to cap the loss, which turns an open-ended risk into a defined one.

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Educational use only. Quotes are delayed ~15 minutes and nothing here is financial advice. Options trading involves substantial risk of loss.