20. Naked Option Writing
As you learn about options, there will come a time when you consider naked option writing. This type of trading can be rewarding, but before trying it, you need to be fully aware of the risks involved in selling naked calls and naked puts.
The word naked is defined in the Funk & Wagnalls Dictionary as “having no covering...”; this is a particularly relevant description of naked option writing. When you sell either a call or a put without any compensating position to “cover” the short option, you are said to be “naked.” By having a short naked call or naked put position in your brokerage account, you are exposed to substantial risk. So, you must be prepared to manage this type of trade if the underlying stock begins to ...
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