Uncovered Option

AAA

DEFINITION of 'Uncovered Option'

A type of options contract that is not backed by an offsetting position that would help mitigate risk. "Trading naked", as it is called, poses significant risks. However, an uncovered options contract can be profitable for the writer if the buyer cannot excecise the option becuase it is out of the money.


Generally, uncovered options are suitable only for experienced, knowledgeable investors who understand the risks and can afford substantial losses.




Also called a "naked option".

INVESTOPEDIA EXPLAINS 'Uncovered Option'

If a market participant sells a call option without owning the underlying instrument, the call is uncovered. If the buyer exercises his or her right to purchase to underlying instrument, the person who sold the call option (the writer) will need to buy the underlying instrument at its current market price in order to fulfill the contract.


Because of the inherent risks in trading uncovered options, many brokers restrict account holders from writing uncovered option positions, thereby limiting clients' exposure to unlimited market risk.

RELATED TERMS
  1. Call

    1. The period of time between the opening and closing of some ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  3. Option

    A financial derivative that represents a contract sold by one ...
  4. Put

    An option contract giving the owner the right, but not the obligation, ...
  5. Derivative

    A security whose price is dependent upon or derived from one ...
  6. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
Related Articles
  1. Naked Options Expose You To Risk
    Options & Futures

    Naked Options Expose You To Risk

  2. Should Your Options Go Naked?
    Options & Futures

    Should Your Options Go Naked?

  3. My brokerage firm won't allow naked ...
    Options & Futures

    My brokerage firm won't allow naked ...

  4. Pick the Right Brokerage Account for ...
    Options & Futures

    Pick the Right Brokerage Account for ...

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center