Writing Naked Law and Legal Definition
Writing naked is an investment strategy used by an option seller in which the trader does not own the underlying security. A writer of a naked call option, therefore, does not own a long position in the stock on which the call has been written. Although naked options are potentially very rewarding they are very risky. If the underlying stock or stock index moves in the direction sought by the investor, profits can be enormous. On the other hand it can lead to large losses if the stock moves in the other direction. For example, if a person writes a naked call option at $50 a share on ABC stock without owning the shares, and if the stock rose to $60 a share, the writer of the option would have to deliver ABC shares to the call buyer at $50 a share. To do so, he or she would have to go into the market and buy them for $60 a share, thereby sustaining a loss of $10 per share. If, on the other hand, the option writer already owned ABC shares when writing the option, he or she could just turn those shares over to the option buyer.