naked option investment & finance definition
An
option contract whose underlying shares are not owned by the person writing the
option. The writer of a naked option exposes him- or herself to risk if the
option contract is exercised by the buyer and the writer doesn’t own the
shares. The writer will have to purchase the underlying shares in the market at
what could be an unfavorable price in order to deliver them according to the
terms of the option contract. Also called uncovered
option.
See naked option in Wall Street Words
An opening transaction in an option when the underlying asset is not owned. An investor writing a call option on 100 shares of IBM without owning the stock is writing a naked option. If the stock is called by the option holder, the writer must purchase shares in the market for delivery and is therefore caught naked. Also called
uncovered option. Compare
covered call option.
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