Uncovered Option

A naked or uncovered option position is one in which the writer of an options contract needs either the shares or funds important to satisfy the terms of the contract would it be a good idea for it be exercised by its buyer. All in all, it is an option contract written with no offsetting positions to safeguard it would it be advisable for it be exercised.
On the off chance that a naked contract is exercised by its buyer since it moves into the money, its writer must think of the fundamental shares or funds to satisfy the contract.

What Is an Uncovered Call Option?

At the point when an investor buys a call option, it gives them the right to purchase 100 shares of a specific stock from the option writer at a specific strike price at the very latest the contract's expiration.
Assuming the value of the stock surpasses the contract's strike price (plus its premium) before its expiration, the buyer of the contract might exercise it to buy 100 shares below market value. On the off chance that the writer of the contract didn't really have the 100 shares important to satisfy the contract, they would have sold a naked or uncovered call.

What Happens When Someone Exercises a Naked Call Option?

Since call options are contracts, their writers are committed to satisfy the terms of the contract should the buyer decide to exercise. On the off chance that a buyer exercises a call option, the writer is contractually obliged to give 100 shares of the underlying stock or security to the buyer at the strike price listed in the contract.
On the off chance that they don't have these shares, they must buy them for market value then sell them to the option buyer for not as much as market value. By doing this, they understand a loss.

What Is an Uncovered Put Option?

At the point when somebody composes a put option contract, the contract's buyer has the privilege to sell the underlying stock to the writer for a pre-decided strike price prior to the contract's expiration.
In the event that, when the option terminates, the strike price is higher than the underlying stock's spot (market) price, the contract owner might decide to exercise their put option so they can sell 100 shares of the stock for more than they are worth, coming about in a capital gain.
This would mean that the writer of the contract would be committed to buy 100 shares of the stock at above market value, bringing about a loss. On the off chance that the writer of this put option had a short position on the stock (or needed more money in their account to buy 100 shares of the stock at the contract's strike price) when they initially composed or sold the contract, they would have sold a "naked" or "uncovered" put.

What Happens When Someone Exercises a Naked Put Option?

Since put options are contracts, their sellers are committed to satisfy the terms of the contract should the buyer decide to exercise. In the event that a buyer exercises a put option, the seller is contractually obliged to purchase 100 shares of the underlying stock or security from the buyer at the strike price listed in the contract.
On the off chance that the option writer needs more money in their account to do as such, they must buy the shares on margin or sell different securities to collect the money important to purchase the shares from the option buyer at the strike price (above market value) framed in the contract. By doing this, they understand a capital loss.

For what reason Do Investors Write Naked Option Contracts?

Investors compose naked options when they hope to profit from options premiums without really spending any money in advance. Naked option writers realize that they might need to purchase shares or gather funds assuming the options they compose are exercised, however they are certain enough that these options won't move into the money that they don't cover the options they write in advance.

How Risky Are Naked Options?

Uncovered options are genuinely risky in that while their potential upside is limited to their premium, their potential downside is typically a lot greater.
With regards to a naked call option, the most a writer stands to make is the premium they charge for the contract. Their expected loss, nonetheless, is unlimited in light of the fact that the price of the underlying security could theoretically go up endlessly.
The higher the price of the security moves over the contract's strike price before expiration, the more capital loss a naked call writer would experience were they forced to sell 100 shares to the contract buyer at the strike price.
With regards to a naked put option, the most a writer stands to make is the premium their buyer pays for the contract. On account of a put, a writer's potential loss is capped on the grounds that a security can't fall below zero dollars in price.
Hence, a naked put writer's loss is capped at the contract's strike price minus its premium times 100. For instance, in the event that a put contract's strike price is $50 and its premium is $1, its writer could experience a capital loss as much as $4,900.

Features

• Selling this sort of option makes the risk that the seller might need to rapidly procure a position in the security when the option buyer needs to exercise the option.
• The risk of an uncovered option is that the profit potential is limited, however the loss potential might produce a loss that is on numerous occasions the best profit that can be made.
• Uncovered options are sold, or written, options where the seller doesn't have a position in the underlying security.