Business and Personal Finance Dictionary

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• UNCOVERED OPTION
  
  An uncovered option, also known as a naked option, is an option you sell, giving the buyer the right to buy the underlying investment from you at a specific strike price. The catch is that you don't own the underlying investment, or enough of it to meet your obligation to sell. If the buyer exercises the option, you will have to buy the underlying investment to be able to deliver it according to the terms of the contract. While you might realize a profit from the premium you receive for selling the option, you could also suffer a loss, if in order to sell, you had to buy the investment at a market price that was higher than the strike price. And that's the situation under which the person holding the option would exercise it.
  
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