An Uncovered Option, also known as a naked option, is a type of options trading strategy where an investor sells or writes a call or put option without owning the underlying security. In other words, the investor is betting on the direction of the price movement of the underlying security without having any actual ownership of the security.Selling a call option involves an obligation to sell the underlying security at the agreed-upon strike price if the option is exercised. Selling a put option involves an obligation to buy the underlying security at the strike price if the option is exercised.Uncovered options are considered to be a high-risk trading strategy because the potential losses are unlimited. If the price of the underlying security moves in an unfavorable direction, the seller of the option may incur substantial losses.Uncovered options are typically only recommended for experienced traders who have a good understanding of the risks and have a well-diversified portfolio. It is important for traders to carefully assess the potential risks and to have a clear understanding of their investment objectives before engaging in uncovered options trading.In conclusion, an uncovered option is a type of options trading strategy where an investor sells or writes a call or put option without owning the underlying security. This high-risk strategy involves an obligation to sell or buy the underlying security if the option is exercised, and it is only recommended for experienced traders who have a good understanding of the risks involved.
