What It Means
A naked option, also called an uncovered option, is a sold call or put with nothing behind it to cap the loss: no shares of the underlying held against a sold call, no cash set aside against a sold put, and no opposite option bought to fence in the risk. The seller collects the premium and carries the full move against them alone.
How It Works
Sell a call while holding the same number of shares (or an equivalent futures position) and it's a covered call: if the price runs past the strike, the shares already held absorb that move, offsetting the loss on the option. Sell that same call with nothing behind it, and there's nothing to absorb anything. The loss is naked, exposed, and uncapped in theory.
Naked puts work the same way in reverse. A cash-secured put sets aside enough cash to actually buy the shares if assigned. A naked put skips that step, so if the price falls sharply, the seller owes the difference without having budgeted for it.
Because the exchange has no way to know in advance how large an uncapped position could get, brokers charge meaningfully higher margin for a naked position than for a covered trade or a spread of similar size. That margin is only a deposit sized to the exchange's worst-case estimate, which is exactly where beginners get tripped up (see Common Mistake below).
You Can Lose More Than You Paid. So Why Would Anyone Sell an Option? walks through exactly why a seller accepts this kind of open-ended risk on purpose.
Example
Nifty is at 24,050. A trader sells one naked weekly call at the 24,200 strike for ₹110. Nifty's lot size is 65 at the time of writing, though it's worth checking the live figure before trading since NSE revises these periodically, so the premium collected is 110 × 65 = ₹7,150.
If Nifty stays below 24,200 through expiry, the call expires worthless and the trader keeps the full ₹7,150, naked or not. The word "naked" matters on the other side of that trade: if Nifty instead spikes to 24,600, the trader owes (24,600 - 24,200) × 65 = ₹26,000 against a premium of just ₹7,150, for a net loss of ₹18,850. Had the same call been sold covered, against an equivalent Nifty futures position bought earlier, that loss would have been offset by the futures position instead of coming entirely out of pocket.
Warning
The margin a broker blocks for a naked position is a deposit against the exchange's worst-case estimate, not the maximum possible loss. A sharp, fast move can cost more than the margin held, and the trader is on the hook for the difference.
Common Variants
- Naked Call: a sold call with no underlying or hedge behind it, the classic uncapped-risk position, since there's no ceiling on how high the underlying can climb.
- Naked Put: a sold put with no cash set aside to cover assignment. The loss is capped only by the underlying's price floor at zero, which can still be a very large number.