Naked Writer

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DEFINITION of 'Naked Writer'

An options seller who does not own the underlying security for the options contract he or she is offering. Options are contracts that give the buyer the right but not the obligation to buy (call) or sell (put) shares at a particular price and future date. Since a naked writer does not hold a position in the underlying security represented in the options contract, the investor is exposed to more risk.


Also called uncovered writer or uncovered options writer.

BREAKING DOWN 'Naked Writer'

Naked writers are exposed to additional risk, since they hold no position with which to hedge against the adverse movement of the underlying security's price. If the options contract is exercised, the naked writer would be forced to buy or sell a certain number of shares at a potentially undesirable price. Naked writers try to profit by receiving premiums for writing the contracts without the need to purchase share lots.

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RELATED FAQS
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    A naked position refers to a situation in which a trader sells an option contract without holding a position in the underlying ... Read Full Answer >>
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    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  3. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  4. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
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