Naked Option

A naked option, also known as an uncovered option, is created when the seller of an option contract does not own the underlying security needed to meet the potential obligation that results from selling (also known as writing or shorting) an option. Selling an option creates an the obligation of the seller to provide the option buyer with the underlying shares or futures contract for a corresponding long position (for a call option) or the cash necessary for a corresponding short position (for a put option) at expiration. If the seller has no ownership of the underlying asset or the corresponding cash necessary for execution of a put option, then the seller will need to acquire it at expiration based on current market prices. With no protection from the price volatility, such positions are considered highly vulnerable to loss and thus referred to as uncovered, or more colloquially, as naked.