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Published On: Thu, Apr 4th, 2013

Naked Option

A naked option is when the seller of an option contract sells call options without owning the underlying assets or securities.

If the option is purchased for a certain price and the actual stock price has dropped, the seller will purchase the underlying asset at the lower price and make a profit, having already sold it at the higher price. If the option contract is purchased for a certain price but the stock price has risen, the seller must purchase the underlying assets at a higher price in order to cover his sale. In this case the seller will take a loss, having sold the option at a lower price and purchased it at a higher price.

This can be a very risky strategy and is absolutely not recommended for investors new to the market.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

 

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