Naked Writer


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.

  1. Uncovered Option

    A type of options contract that is not backed by an offsetting ...
  2. Naked Call

    An options strategy in which an investor writes (sells) call ...
  3. Options Contract

    A contract that allows the holder to buy or sell an underlying ...
  4. Naked Position

    A securities position that is not hedged from market risk. Both ...
  5. Naked Put

    A put option whose writer does not have a short position in the ...
  6. Put-Call Parity

    A principle that defines the relationship between the price of ...
Related Articles
  1. Options & Futures

    Naked Options Expose You To Risk

    Find out why these enticing options can spell trouble for your bottom line.
  2. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  3. Options & Futures

    Pick 401(k) Assets Like A Pro

    Professionals choose the options available to you in your plan, making your decisions easier.
  4. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  5. Investing

    The Best Strategies to Manage Your Stock Options

    We look at strategies to help manage taxes and the exercise of incentive and non-qualified stock options.
  6. Investing Basics

    Retirement Planning Using Long-Dated Options

    Retirement planning using high-risk options? It is possible, and studies confirm better yields than conventional methods. Here’s how.
  7. Investing Basics

    Understanding Vega

    In options trading, vega represents the amount option prices are expected to change in response to a change in the underlying asset’s implied volatility.
  8. Options & Futures

    Introduction to Options Types

    Options are often the bread and butter of day traders. Here are some of the more common types of options.
  9. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  10. Home & Auto

    Understanding Rent-to-Own Contracts

    They can work for you or against you. Here's how to negotiate a fair one.
  1. My brokerage firm won't allow naked option positions. What does this mean?

    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 >>
  2. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  3. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  4. 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 >>
  5. 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 >>
  6. What is the difference between derivatives and options?

    Options are one category of derivatives. Other types of derivatives include futures contracts, swaps and forward contracts. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  2. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  3. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  4. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  5. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  6. Capitalized Cost

    An expense that is added to the cost basis of a fixed asset on a company's balance sheet. Capitalized Costs are incurred ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!