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LSDefine

Simple English definitions for legal terms

naked option

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A quick definition of naked option:

A naked option is a type of option contract where the seller does not actually own any or enough of the underlying stock. This means that when the buyer exercises the option, the seller must purchase the shares and sell them under the terms of the option contract. There are two types of naked options: naked call option and naked put option. Traders and investors like naked options because the predicted volatility is already factored into the price. However, there is a risk of a large loss if the price changes dramatically before expiration.

A more thorough explanation:

A naked option, also known as an "uncovered option," is a type of option contract where the seller does not actually own any, or enough, of the underlying stock. This means that when the buyer exercises the option, the seller must purchase the shares and sell them under the terms of the option contract.

There are two types of naked options:

  • Naked call option: This is when the seller makes a short position in their account.
  • Naked put option: This is when the seller makes a long position in their account, purchased with available cash.

Traders and investors prefer naked options because the predicted volatility is already factored into the price. However, there is a risk of large loss if the price changes dramatically before expiration.

Let's say that John sells a naked call option to Jane for 100 shares of XYZ stock at a strike price of $50 per share. John does not actually own any shares of XYZ stock. If the price of XYZ stock goes up to $60 per share and Jane exercises the option, John will have to purchase 100 shares of XYZ stock at the market price of $60 per share and sell them to Jane for $50 per share, resulting in a loss of $1,000.

This example illustrates the risk of selling a naked option without owning the underlying stock. If the price of the stock moves against the seller, they can face significant losses.

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MIAMI A
[] AromaticTroubledDormouse
20:55
How does one know if they are UR1 or UR2?
[] AromaticTroubledDormouse
20:56
CONGRATS MACAQUE!
TY
got a random stanford email and almost had a heart attack
ALSO CONGRATS!
Congrats1!
21:15
Miami A, yall I'm so excited I could cry.
21:15
Feel like I can finally stop holding my breath!! Whew!!!
[] baddestbunny
22:16
every time I get accosted by a strange man who follows me around because my male coworkers were too busy talking to walk me back to my car I get closer to saying we need to bring back traditional gender roles
Dkk
22:32
Nice! @Macaque
Dkk
22:32
@Aromatic, Have to guess.
Dkk
22:33
That sucks @Bunny do you have to go to the hospital?
[] baddestbunny
22:40
I said accosted not assaulted
23:35
guys. my notre dame address just went long is this good or bad
1a2b3c4d26z
23:37
Oooooo me too
23:37
omg is this good or bad
Dkk
23:47
Idk if gender roles are gunna fix that then.
23:49
it looks like most people who applied in october last cycle didn't get a decision until january... does it even mean anything that our addresses went long??
hows ED 2 compared to ED 1?
Dkk
0:10
No idea
windyMagician
0:34
reporting live to say my ndls address also went long
does it mean anything ^
Dkk
2:21
NDLS and Fordham took a very long time last year. It's good info for people to know.
[] baddestbunny
4:29
let’s get after it boys and girls
Dkk
5:21
I gtg to bed soon.
Dkk
5:22
Big day today. Gunna be a crazy one. I will sleep through the first half.
good morning lsd it is 5 am EST
also jazzy my ndls address went long ages ago i sadly do not think it means anything
my stanford address also went long LOL i think at most it's an indicator it's under review
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