naked option

(FINANCE) a call option that is written by a party who possesses none of the underlying stock; a commitment to sell a fixed amount of something at a fixed price, of something one does not happen to have.

Writing an option means selling a certificate that guarantees the holder can buy a traded item for a guaranteed price (strike price). The person who writes the option is betting that the price of the underlying stock will go down (shorting a stock, AKA a short position). If the person writing the option is correct, then she makes money off the sale of the option, but does not have to worry about honoring the option, since it is out of the money and has no intrinsic value.

If the person writing the option is wrong, and the price of the underlying stock goes up, then she must buy the item at the higher spot price specifically to sell it at the low strike price ("short cover"). In rare cases, a person who makes this sort of error will actually drive the spot price much higher than it would have gone ordinarily.

Naked option writing is quite risky because you can make only a limited amount of money. yet the risks are high.

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