Naked Position

What is a Naked Position?

In securities trading as a general rule, a naked position alludes to a securities position, long or short, that isn't hedged from market risk. Both the expected gain and the potential risk are greater when a position is naked rather than covered or hedged somehow or another. In options trading this phrase specifically alludes to an option sold by a trader without a laid out position in the underlying security.

Grasping a Naked Position

A naked stock position doesn't have the hedging associated with a call or put option or maybe a contrary position in a connected stock. For instance, a long in Coke and a short in Pepsi.

A naked position is innately risky on the grounds that there is no protection against an adverse move. Most investors don't consider claiming stocks to be unreasonably risky, particularly in light of the fact that by and large it is not difficult to sell the position back to the market. Nonetheless, a declining market for an investor holding a long position in a stock actually can possibly deliver huge losses. In this case, holding a put option against the long stock position could, at a small cost, cap losses to a reasonable amount.

The investor's profit potential, before commissions, would be diminished by the premium, or cost, of the option. Believe it to be an insurance policy the investor trusts never to utilize.

Investors selling stocks short without hedges face even greater risk since the upside potential for a stock is theoretically unlimited. In this case, claiming a call on the underlying stock would limit that risk.

Naked Options

In the options market, uncovered or naked calls and puts likewise have risk. In this case, it is the options seller, or [writer](/composing an-option), that has no hedge against being assigned. Options buyers just risk the amount paid to buy the options, which is typically altogether not exactly the amount expected to purchase genuine shares of stock or another underlying asset.

Options sellers, then again, can have unlimited risk in the event that not hedged. For instance, an investor sells a call option on a stock and that stock takes off higher in price before expiration. The options buyer could likely exercise the option, driving the seller to go out into the open market to buy the stock at the higher price to deliver it to the options buyer. Assuming the options seller owned an offsetting position in the underlying stock, their risk would be limited.

Put sellers would have almost unlimited risk should the underlying security fall towards zero. A relating short position in the underlying stock would limit that risk.

Notwithstanding, in additional down to earth terms, the seller of uncovered puts or calls will probably repurchase them a long time before the price of the underlying security creates some distance from the strike price, in view of their risk tolerance and stop loss settings.

Further developed options traders can hedge risk with various positions of puts and calls, called combinations.

Features

• This phrase is all the more frequently associated with short-selling stocks.
• A naked stock position is a position that isn't hedged.
• A naked position is likewise generally used to allude to an option that is sold without a position in the underlying security as protection against the risk of option assignment.