What is a naked option? Does this mean you do not own stock? Is owning stock in something you buy an option?

Question

against what they call owning the "underlying security"?

Answer 1

Yes, it means you do not own the stock to protect or hedge yourself. The most common naked option position is a naked short call position. This means I do not own the stock (or other underlying security) but I am short a call option.

Example: GE is a $50 stock
Short a 3-month call at X=$55 (for U.S. stocks, 1 option contract is for 100 shares)
X= exercise price, in this case it is the price we agree to sell GE at anytime within the next 3-months.
Lets say the option's price or premium is $3.95.
We get the $395 (3.95 x 100) and we do not own GE.

We now have a naked short call position.
We keep the $395 if GE is less than $55 in 3-months. The option expires worthless and we make all the price as profit.

Lets say GE is $62 in 3-months.
We can: buy GE for $6200 to deliver at $55 for $5500, lose $395 - $700

Or we can: buy-to-close (cover) the short call position which has a price of $7.00, lose $395 - $700........

Answer 2

A naked option is writing a call or put on a stock you do not own.Lets say you feel that GE will not go above 35 (you don't own it) so you write an uncovered call at 35 , iif the stock goes down and is below 35 at expiration, nothing happens, you keep the proceeds from writing the call. If it i above 35, you must delivery the stock no matter what the price is. Say its now 38 at expiration, you broker will buy the stck at 38 and immediat4ely sel it at 35 your strke, you ose $300 minus the premium you received for selling the uncovered call. Naked call wriiting can be risky, as you may be chared the price of the underlying stock if you are wrong. It's best to stay with coverd call writing on stuff you already own, and would'nt mind losing if you called it wrong;

Answer 3

If you buy or sell options without the underlying stocks in hand then you are called a naked options buyer or seller. Otherwise a covered option writer or seller. You look into a basic options book. It gives some profitability graphs which will make it more clearer on options. If you have a University Library close by you can check out in a book on options or a book called Financial Controls by Harold Bierman. He gives this profitability graphs which will make it very clear to you regarding different scenarios how the price moves. After that you can get into more areas like greeks and then strategies. Without this knowledge it will be very risky and will be like gambling.

Answer 4

A call option gives you the right (not the obligation) to buy 100 shares at the strike price any time before expiration. If the price exceeds the strike at expiration your broker will almost certainly exercise the option automatically. If you don't want the stock, just sell the call at a profit. Naked vs. covered refers to selling options, not buying them. You're "covered" if you already own the shares you're selling the calls against. You'll likely need a margin account to sell naked options, as the risk is quite high. Don't forget the flip side of the option universe. If you're bearish on a stock, you can buy a put option, which gives you the right to sell 100 shares at the strike. Again, you don't need to own the stock, though many shareholders use puts as insurance against a major decline.

Answer 5

A naked option is either

a long option with no offsetting short position or
a short option with no offsetting long position.

The offsetting position may be either another option position or the underlying security.

Naked positions are not always as risky as some people think they are. For example, if you buy a stock and sell a call option on it you create a "covered call" position. Most people consider this a conservative strategy. However, if you sell a naked put on the same stock, using the same strike price and expiration date, you create the same risk profile. Even though the potential risks and rewards are the same, many people who would consider a covered call position conservative would consider a naked put position speculative.