Covered and uncovered option
Explaining The Naked Call
Also found in: DictionaryThesaurus. Naked Option An option contract without another, opposite option hedging the risk. Unlike more complex spreads and straddleswhich involve the purchase or sale of multiple options in order to profit in different ways, naked options are straightforward calls or puts.
An investor with a naked option makes a profit or loss depending on the movement of the underlying asset. Naked options are also called uncovered options.
Updated May 23, What is a Naked Call? A naked call is an options strategy in which an investor writes sells call options on the open market without owning the underlying security. This stands in contrast to a covered call strategy, where the investor owns the underlying security on which the call options are written.
See also: Covered options. Farlex Financial Dictionary.
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Published by Houghton Mifflin Company. All rights reserved. Uncovered option.
Updated Mar 5, What is an Uncovered Option? In option trading, the term "uncovered" refers to an option that does not have an offsetting position in the underlying asset. Uncovered option positions are always written options, or in other words options where the initiating action is a sell order. This is also known as selling a naked option.
An uncovered option, also known as a naked option, is an option that is not backed by another position. For example, if you sell a call option without owning the stock that you would have to deliver if the option holder exercised, the call is uncovered.
Updated Jul 28, Covered Call vs.
Similarly, if you sell an uncovered put, you don't have adequate cash in reserve to fulfill your obligation to purchase the underlying instrument at exercise. Writing uncovered contracts can put you at significant risk despite the premium you collect when you open the position. For example, if a naked call option were exercised and assigned to you, you would have to buy the underlying instrument at its market price to be able to meet the terms of the contract.
Because of the covered and uncovered option risk, your brokerage firm may restrict your right to write uncovered positions or may require you to trade these options in a margin account.
Dictionary of Financial Terms. All Rights Reserved.
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- The forecast must predict that the stock price will not rise above the break-even point before expiration.
- Uncovered Option Definition
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