Naked Options

A naked option is an options contract (a bet on whether a stock price will go up or down) where the seller doesn't own the underlying stock or have cash set aside to cover potential losses. You'll hear about naked options mostly in advanced trading discussions because they're risky—if the bet goes wrong, losses can be unlimited. For example, if Sarah sells a naked call option on TechCorp stock, she's betting the price won't rise above a certain level. If it skyrockets instead, she could lose far more than the premium she collected. Most brokers restrict naked options to experienced traders, and they're banned in some retirement accounts. The appeal is quick profits, but the downside makes them dangerous for beginners.