Naked Calls and Naked Puts

A naked option, or a short option, is an options contract sold without owning the underlying asset (for calls) or without having sufficient cash to cover the obligation (for puts). Naked calls are risky because losses can be unlimited if the stock price skyrockets. Naked puts expose the seller to significant risk if the stock drops sharply. Because of the high risk, brokers often require substantial margin and experience before allowing traders to sell naked options. See also: Short Calls and Short Puts