Business and Personal Finance Dictionary

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 

• NAKED OPTION
  
  When you write, or sell, a call option but don't own the underlying security, the option you're writing is described as naked. You can make a profit if the underlying investment performs as you expect, and no one exercises the option, because you collect a premium when you sell it. The risk you run, however, is that someone will exercise the option, and you'll have to buy the investment at market price in order to meet your obligation to sell. If that price has moved in the opposite direction from the one you expected-gone up instead of down-buying the investment could cost you a substantial amount of money, and you'd have an overall loss.
  
  Back