The Risk of Naked Option Writing
You will often hear that selling a naked option exposes you to “unlimited risk.” Although this is not literally true, the risk can be large enough to cause considerable loss in you brokerage account. To realistically illustrate the magnitude of the risk, we will consider some actual market situations where substantial losses were generated for those traders who sold naked options.
Example 1. Naked put
In early June 2004, OVTI stock was moving up nicely as the earnings announcement scheduled for June 9 was approaching. Many analysts expected the announcement to reveal that the profits of this high profile company were continuing to grow as had been reported in the past. With the stock trading a little over $25 on ...