What is Naked Option?
The naked option is the trading option where the trader does not have underlying security to protect itself against the adverse price movement.
Description of Naked Option
If the prices move against the trader and he has no underlying security than he might need to buy the contrast no matter how high it is in its price. The potential for losses can be unlimited and the brokers in result have different rules following the naked trading. The traders for the naked option must be experienced and the un-experienced traders are not allowed to place any purchase. The naked trading is considered sensitive as it can have a serious loss.
Naked options are also called uncovered options. If, the trader want to have efficient earnings than he must need to have underlying assets. The naked options can have both the gain or loss which depends on the underlying assets of the trade. If the stock is called by the stockholder or the option holder than in such case the writer needs to purchase the in the market for delivery and thus he is called naked. The gain or loss in the naked option are fifty-fifty and are based underlying assets.