Close this search box.

Table of Contents

Uncovered Option


An uncovered option, also known as a naked option, refers to an options strategy where the seller of the option does not hold the underlying asset or a hedge position. This approach carries significant risk since the seller is obligated to meet the contract terms if the buyer exercises the option. Uncovered options have the potential for unlimited losses, as the seller faces liability without the protection of an offsetting position.


The phonetics for the keyword “Uncovered Option” are:Uncovered: /ʌnˈkʌvərd/Option: /ˈɒpʃən/

Key Takeaways

  1. An uncovered option, also known as a naked option, is a financial strategy where the investor sells or writes call or put options without owning the underlying asset or having offsetting contracts. This increases risk exposure due to the potential for unlimited losses on sold calls and substantial losses on sold puts.
  2. Investors trading uncovered options aim for profit based on their expectation of the price movement of the underlying asset. In the case of an uncovered call, the investor anticipates that the asset’s value will decrease or remain flat; whereas, with an uncovered put, the expectation is that the asset’s value will increase or remain flat.
  3. Uncovered options are generally considered to be high-risk strategies due to their unlimited potential for loss, particularly in uncovered call positions. Accordingly, only experienced, sophisticated traders and investors with a high-risk tolerance should consider employing this strategy. Many trading platforms and brokerage firms require investors to meet additional criteria to qualify for trading uncovered options.


The term “Uncovered Option” is important in the realm of business and finance as it refers to an option writing strategy where the writer does not hold an offsetting position in the underlying asset. This scenario poses a higher level of risk for the option writer, as they are fully exposed to the potential losses if the option is exercised and the market moves against their position. Uncovered options, also known as naked options, are primarily used by experienced traders and investors who engage in sophisticated trading strategies. The significance of understanding an uncovered option lies in the risk management aspect, as it necessitates balancing potential rewards with the increased risk exposure, while taking into consideration the associated margin requirements and possible consequences that may emerge from unfavorable market movements.


Uncovered options, also known as naked options, serve as a high-risk, high-reward strategy for traders and investors seeking to capitalize on potential market movement without actually owning the underlying asset. Essentially, strategy in this context involves writing and selling call or put options without owning or holding a position in the corresponding underlying security or other protection that would minimize risk exposure. Although this speculative technique offers the potential for substantial returns, it likewise exposes the option writers to potentially unlimited losses, as the underlying asset’s value can move against their position. Despite the inherent risks, uncovered options are employed for various purposes, such as generating income and capitalizing on market conditions. For example, an investor confident in their market analysis may write an uncovered put option, hoping that the price of the underlying asset will stay above the strike price before the option expires. In this scenario, they would profit from the premium received without needing to buy the asset. Conversely, a trader could write an uncovered call option, aiming to profit from an anticipated downturn in the underlying asset’s value. Overall, the purpose of uncovered options is to provide traders and investors with a tool to take advantage of price fluctuations while seeking potentially higher returns, though at the expense of increased risk exposure.


An uncovered option, also known as a naked option, is an options trading strategy where the investor writes or sells options contracts without owning the underlying securities. This can lead to potentially unlimited risks. Here are three real-world examples of uncovered options: 1. Uncovered Call Option – For instance, an investor might sell an uncovered call option on Apple Inc.’s stock. If they don’t own any shares of Apple Inc., they would be selling the option without having the underlying security. If the stock price rises significantly, and the option is exercised, the investor will have to buy shares at the market price to cover their obligation, which would lead to substantial losses if the share price has risen significantly higher than the strike price. 2. Uncovered Put Option – A trader could sell an uncovered put option on Tesla Inc.’s stock without owning any shares of the company. If the stock price falls below the strike price of the option before the expiration date, the trader will have to buy shares at the strike price, even if the market price is much lower, which could result in substantial losses. 3. Writing Uncovered Options on a Stock Index – Another example is a scenario in which an investor writes a naked call option on a stock index ETF, such as the SPDR S&P 500 ETF Trust (SPY). Without owning the underlying securities, the investor is exposed to the risk of the entire index rising, and they would be responsible for buying the shares at the market price to cover their obligation if the option is exercised. This could lead to significant losses if the market experiences a strong rally.

Frequently Asked Questions(FAQ)

What is an Uncovered Option?
An Uncovered Option, also known as a naked option, is a type of options contract where the seller does not hold the underlying asset or a corresponding offsetting option position. It is a higher risk strategy due to the potential for unlimited losses if the market moves against the position.
How do Uncovered Options work?
In an Uncovered Call Option, the seller writes a call option without holding the underlying asset, expecting the asset’s price to remain below the strike price. In contrast, an Uncovered Put Option involves writing a put option without holding a corresponding short position in the underlying asset, assuming the asset’s price will remain above the option’s strike price.
What are the risks associated with Uncovered Options?
Uncovered Options carry a higher risk compared to covered options as the potential losses can be unlimited if the market moves against the seller’s position. Additionally, uncovered option sellers face the risk of margin calls if the broker requires additional collateral due to unfavorable market movements.
What is the difference between a Covered Option and an Uncovered Option?
A Covered Option is a strategy where the seller of the option holds a corresponding position in the underlying asset or another option. This reduces the risk associated with potential market movements. In contrast, an Uncovered Option refers to a situation where the seller does not hold any offsetting position, leading to a higher risk exposure.
Who might use Uncovered Options as part of their trading strategy?
Experienced traders, institutions, or investors with a higher risk tolerance may use uncovered options to generate income or leverage their market exposure. However, it is essential to understand the substantial potential risks involved before engaging in this type of trading strategy.
Are Uncovered Options suitable for beginner investors?
Uncovered Options are generally not recommended for beginner investors due to the high risk involved and the potential for unlimited losses. Beginners should focus on understanding lower-risk strategies and gradually moving on to more complex trades as they gain experience and confidence in the market.

Related Finance Terms

Sources for More Information

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More