Naked Option

A naked option is an options position where you sell (write) an option contract without owning or holding an offsetting position in whatever it's based on, called the underlying (usually shares of stock or a futures contract). "Naked" and "uncovered" mean the same thing, and both are the opposite of a "covered" position, where the seller already holds shares (or another hedge) that would let them deliver on the obligation if the option is exercised against them.

When you write an option, you're taking on an obligation, not a right. Selling a naked call means you're obligated to sell the underlying at the strike price if the buyer exercises, but you don't own any shares to deliver, so you'd have to buy them at whatever the market price is and hand them over at the lower strike price. Selling a naked put means you're obligated to buy the underlying at the strike price if exercised, without having set aside the cash or a hedge to cushion that purchase. Either way, you collect a premium upfront for taking on the risk, but the potential loss is not capped the way it is in a covered position.

The nuance that trips people up is how asymmetric the risk becomes. A naked short call has theoretical unlimited loss potential, because a stock's price can rise indefinitely, and you'd have to buy it at whatever that price is to cover the sale at the fixed, lower strike. A naked short put has a large but finite loss potential, capped only by the underlying falling all the way to zero. Covered positions cap or offset this risk because the shares you already hold rise or fall in step with your obligation; naked positions have no such cushion, which is why brokers treat them as far riskier and impose stricter requirements to open them.

Because of that risk, opening naked option positions typically requires a higher options trading approval level from your broker and involves posting margin, collateral held by the broker as a buffer against potential losses. The exact approval tiers, margin formulas, and account minimums are set by individual brokers within rules from options exchanges and regulators, and they vary and change over time.