Uncovered Option Law and Legal Definition

Uncovered options are short options purchased without ownership of the underlying asset. It is uncovered if the writer does not have long stock to deliver or does not own another call on the same security with a lower or same strike price, and with a longer or same time of expiration. The strategy is based on the belief if the buyer chooses to purchase the underlying investment, the seller will be able to acquire the investment at a price that is lower than the rate quoted to the buyer. However this may not be the case always and so can be risky. In spite of the risks involved, the uncovered option is a common investment strategy for many individual and institutional investors.