Question Details

	Username: Fluffy Rating: Asked to: Heng Kim Date Created: 19 Aug 2016
Category	17
Tag	Financial
Question	What is a 'Naked Option'?

Advice from Guru

Hi Fluffy,

A naked option is a trading position where the seller of an option contract does not own any, or enough, of the underlying security to act as protection against adverse price movements. If the price of the underlying security moves against the trader, who does not already own the underlying security, he or she would be required to purchase the shares regardless of how high the price is. The potential for losses, then, can be unlimited, and as a result, brokers typically have specific rules regarding naked trading. Inexperienced traders, for example, would not be allowed to place this type of order.

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