Naked Option

A naked option (also called an uncovered option) is an options position where the seller (writer) of the option does not hold an offsetting position in the underlying asset or a hedging options leg to protect against adverse price moves. Writing a naked call option without owning the underlying shares exposes the seller to theoretically unlimited risk if the underlying price rises sharply above the strike price. Writing a naked put exposes the seller to significant losses if the price falls sharply below the strike. Due to the substantial risk involved, SEBI and Indian exchanges require naked option writers to post significant margin as collateral. Naked options are only appropriate for experienced traders with a thorough understanding of options risk and the financial capacity to absorb potential large losses.