What are Naked Options?

If a trader sells an option without owning the underlying asset, this is referred to as a naked option. The sale of naked options is associated with unlimited risk but limited potential. A naked option is also referred to as an uncovered option. With a naked option, the seller is obligated to deliver to the option buyer at expiration the underlying shares or futures contracts for a corresponding long position (in the case of a call option) or the amount of money required for a corresponding short position (in the case of a put option). In the case of a seller who has sold a put option, this would ultimately result in the creation of a long position in shares in the option seller's account — a position purchased with cash from the option seller's account.