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Naked Option

Naked Option

A Naked Option is an options contract that is sold or bought without any corresponding position in the underlying asset. The two types of naked options are naked calls and naked puts.
  • Naked calls: A naked call option is when a trader sells a call option without owning the underlying asset. This means that the trader is betting that the price of the underlying asset will not rise above the strike price of the call option. If the price of the underlying asset does rise above the strike price, the trader will be obligated to sell the underlying asset at the strike price, potentially incurring a loss.
  • Naked puts: A naked put option is when a trader sells a put option without having a short position in the underlying asset. This means that the trader is betting that the price of the underlying asset will not fall below the strike price of the put option. If the price of the underlying asset does fall below the strike price, the trader will be obligated to buy the underlying asset at the strike price, potentially incurring a loss.
Naked options are considered to be high-risk strategies, as the trader can potentially lose more than the premium received if the price of the underlying asset moves against their position. Therefore, it is recommended that traders only use these strategies if they have a high level of risk tolerance and are comfortable with potentially incurring significant losses.
In summary, Naked option is an options contract that is sold or bought without any corresponding position in the underlying asset, the two types of naked options are naked calls and naked puts, where naked call is when a trader sells a call option without owning the underlying asset, and naked put is when a trader sells a put option without having a short position in the underlying asset. These strategies are considered to be high-risk, as the trader can potentially lose more than the premium received if the price of the underlying asset moves against their position.
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