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 and the potential risk are great🦋er 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 long in Coke and a shortᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ 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开奖号码历史查询:long position in a stock still has the potential to deliver significant losses. In this case, holding a 澳洲幸运5开奖号码历史查询:put option against the long stock position could, for a small ℱprice, cap losses to a manageable amount.

The investor's profit potential, before 澳洲幸运5开奖号码历史查询:commissions, would be reduced by the premium, or cost, of the option. Consider it to be a🐼n insurance policy the investor hopes never to use.

Investors 澳洲幸运5开奖号码历史查询:selling stocks short without hedges face even𝔉 greater risk since the upside potential 🐲for a stock is theoretically unlimited. In this case, owning a call on the underlying stock would limit that risk.

Naked Options

In the options market, 澳洲幸运5开奖号码历史查询: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 𒁃to buy the options, which is nor🅷mally significantly less than the amount needed to purchase actual shares of stock 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开奖号码历史查询:expiration. The options buyer could likely exercise the option, forcing the seller to go out into the 澳洲幸运5开奖号码历史查询:open market to buy the stock at the higher price in order to deliver it to the options buyer. If the options seller owned a൩n 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开奖号码历史查询:underlying security fall t𓆏owards zero. A corresponding short position in the underlying stock would 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开奖号码历史查询:strike price, based on their risk tolerance and 澳洲幸运5开奖号码历史查询:stop loss settings.

More advanced options traders can hedge risk with multiple positions of puts and calls, called 澳洲幸运5开奖号码历史查询:combinations.