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Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Basic concepts
Advanced
Naked Option
Selling an option without holding a corresponding position in the underlying asset, exposing the trader to significant risk.
Detail
A naked option is an option that has been written (sold) without being covered by the underlying asset or another option. For example, a naked call refers to selling a call option without owning the shares required for delivery if the option is exercised.
A naked put means selling a put option without holding a short position in the stock or hedging it with another option.
Even though brokers require margin as collateral, the position remains uncovered because the trader does not hold any asset (stock or option) to protect it. Naked options carry a high risk of loss and are suitable only for experienced traders with substantial capital and strong risk management skills.
A naked option is an uncovered short option position, meaning the trader does not hold the underlying asset as collateral. A naked call involves selling a call option without owning the stock, while a naked put refers to selling a put option without holding a short stock position or using another option as a hedge.
While brokers require margin to cover potential losses, the position is still considered naked because the trader lacks any asset to offset losses if the market moves against them. For example, selling a naked call on TSLA obligates the trader to sell 100 shares at the strike price, even if they do not own them. If the stock price surges, they must buy shares at market price to fulfill the obligation, potentially leading to massive losses. Similarly, selling a naked put forces the trader to purchase shares at the strike price, even if the stock has plummeted far below that level.
The primary appeal of writing naked options is the high premium received, but this comes at the cost of significantly increased risk exposure. Naked options are considered one of the riskiest option strategies and should only be used by traders who fully understand their potential liabilities.
Optimal conditions
Only for very experienced traders with high capital and access to a margin account. Often only meaningful for distant OTM options with low probability of assignment, but even there there is a risk of unexpected market movements. Not suitable for beginners.
Max profit
The premium received for writing an option. Fixed and limited. E.g. $3 premium = $300 per contract.
Max loss
Unlimited for naked call (if the stock goes up “infinitely”).
Very high for naked put — if the stock falls to zero, I have to buy 100 shares at strike price.
So max. loss = strike x 100 - premium.
Risks
Unlimited loss (call), high margin call threat, need to deliver shares (call) or buy shares at a disadvantageous price (put). Possible liquidation of the account, debt to the broker. High risk in case of unexpected movements (earnings, news, geopolitics). Not suitable without precise risk management.
Greeks
Delta: As the option approaches ITM, delta increases = greater assignment risk.
Gamma: Sharp market movements change delta, increasing risk.
Vega: Increasing volatility (IV) increases the value of the option = open loss for the writer.
Theta works in favor of the writer (time decay), but does not protect against market movements.
Variations
Naked Call, Naked Put, some Ratio Spreads (e.g. more options written than bought).
Usage example
A trader expects AAPL stock to stay above $130 for the next 30 days. He writes a naked put option with a strike price of 110, 20% below the current price. The premium received is $1.20 (=$120 per contract). If AAPL stays above 110, the trader keeps the premium as profit. This type of put option may make sense if the trader is interested in buying the stock at a lower price but is willing to accept the risk of being assigned to it. Similarly, if the stock is very high and the trader does not expect further growth, he can write a naked call option to receive a premium, e.g. at a strike price 30% above the current price.
DTE
Short DTE (7-30 days) used due to fast time decay (Theta), but risk of sudden market movement, lower premium.
Long DTE = higher premium, longer margin blocked.
IV (implied volatility)
High IV = higher premium, but also higher margin and higher risk of sudden movement. Low IV = lower premium, lower margin, but lower return.
Premium
The premium received is a fixed profit if the option expires OTM. A high premium is tempting, but it comes with higher risk.
Margin
Broker usually requires 4-22% of the contract value, depending on IV, delta and DTE.
Margin covers at least part of the possible losses.
Notes
Writing naked options is a risky strategy. “Naked” means that I have no cover — stock or options. It is necessary to have clear risk management, capital to cover margin, and an exit plan. It is often limited or prohibited for retail traders. The alternative is covered options (Covered Call, Protective Put) or spreads.
If used correctly can be very consistent and profitable strategy.
Tags
naked option, uncovered option, short option, high risk, margin requirement, call writing, put writing, unlimited loss, assignment risk, risk management, option premium, volatility exposure
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