What is a Naked Position?

In securities trading in general, a naked position refers to a securities position, long or short, that is not hedged from market risk. Both the potential gain a👍nd the potential risk are greater when a position is naked instead of covered or hedged in some way. In options trading this phrase specifically refers to an option sold by a trader without an established position in the underlying security.

Understanding a Naked Position

A naked stock position does not have the hedging associated with a call or put option or perhaps an opposite position in a related stock. For example, a l🌺ong in Coke and a short in Pepsi.

A naked position is inherently risky because there is no protection against an adverse move. Most investors do not consider owning stocks to be excessively risky, especially because in most cases it is easy to sell the position back to the market. However, a declining market for an investor holding a 澳洲幸运5官方开奖结果体彩网:long position in a stock still has the potential to deliver significant losses. In this case, holding a 澳洲幸运5官方开奖结果体彩网:put option against the long stock position could, fo♊r a small price, cap losses to a manageable 𝄹amount.

The investor's profit potential, before 澳洲幸运5官方开奖结果体彩网:commissions, would be reduced by the premium, or cost, of the option. Consider it to be an insurance policy the investor hopes♑ n🍸ever to use.

Investors 澳洲幸运5官方开奖结果体彩网:selling stocks short without hedges face even greater risk since the upside potential for a stock is theoretically unlimited. In this case, owning a call 𒁃on the underlying stock would li✅mit that risk.

Naked Options

In the options market, 澳洲幸运5官方开奖结果体彩网:uncovered or naked calls and puts also have risk. In this case, it is the options seller, or writer, that has no hedge against being assigned. Options buyers only risk the amount paid to buy the options, which is normally significantly less than the amount needed to purchase actual shares of stoꩲck or another underlying asset.

Options sellers, on the other hand, can have unlimited risk if not hedged. For example, an investor sells a call option on a stock and that stock soars higher in price before 澳洲幸运5官方开奖结果体彩网:expiration. The options buyer could likely exercise the option, forcing the seller to go out into the 澳洲幸运5官方开奖结果体彩网:open market to buy the stock at ꦜthe higher price in order to deliver it to t🧜he options buyer. If the options seller owned an offsetting position in the underlying stock, their risk would be limited.

Put sellers would have nearly unlimited risk should the 澳洲幸运5官方开奖结果体彩网:underlying security fall towܫards zero. A corresponding short position in the underlying stock wou🐠ld limit that risk.

However, in more practical terms, the seller of uncovered puts or calls will likely repurchase them well before the price of the underlying security moves adversely too far away from the 澳洲幸运5官方开奖结果体彩网:strike price, based on their risk tolerance and 澳洲幸运5官方开奖结果体彩网:stop loss settings.

More advanced options traders can hedge risk with multiple positions of puts and calls, called 澳洲幸运5官方开奖结果体彩网:combinations.