Definition
Naked Option Selling
Naked option selling is writing a call or put without a hedge or the underlying, exposing the seller to large or unlimited risk.
A naked (or uncovered) short option collects premium but leaves the writer fully exposed: a naked short call has theoretically unlimited loss if the underlying rallies, and a naked short put has large loss if it crashes. There is no offsetting long position to cap the damage.
Because of this open-ended risk, SEBI's SPAN plus exposure margin for naked options is far higher than for spreads. Many Indian retail traders sell naked Nifty and Bank Nifty options for the theta income, but the gamma and gap risk near expiry make defined-risk structures like iron condors a safer alternative.
Related terms
- Iron CondorAn iron condor sells an out-of-the-money call spread and put spread to earn premium in a range-bound market with defined risk.
- SPAN MarginSPAN margin is the core risk-based margin for F&O positions, calculated by simulating worst-case price and volatility moves.
- Theta Decay (Time Decay)Theta decay is the daily loss in an option's value purely due to the passage of time, accelerating as expiry nears.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.