What is a Naked Option? Definition, Formula, and Example
A naked option is a short call or put sold without owning the underlying shares or holding an offsetting hedge, leaving the seller exposed to theoretically unlimited loss on a naked call and substantial loss on a naked put if the stock moves against the position.
What is a naked option?
A naked option — also called an "uncovered" option — is a short call or short put where the seller holds no offsetting position in the underlying. Selling a naked call means being obligated to deliver 100 shares at the strike price if assigned, without already owning those shares; selling a naked put means being obligated to buy 100 shares at the strike, without having set aside the full cash to do so. This is the defining difference from a covered call (short call backed by owned shares) or a cash-secured put (short put backed by cash for the full purchase obligation) — in both of those, the seller already holds what they'd need to deliver on assignment. Naked, they don't, and the position relies on margin instead of full collateral.
How risk and margin are calculated
A naked call has theoretically unlimited risk: the stock can rise without limit, and the seller must deliver shares at the strike regardless of how high the market price has gone, so maximum loss is uncapped. A naked put has substantial but bounded risk: the stock can only fall to zero, so maximum loss is capped at (strike price − premium received) × 100 per contract. Because full collateral isn't posted, brokers require margin sized to the risk. A common formula (mirroring OCC/Reg-T methodology) is: margin requirement = greater of [20% of underlying price − out-of-the-money amount + premium] or [10% of underlying price + premium], per contract, subject to a broker-set minimum. The 20% figure is reduced dollar-for-dollar by how far out-of-the-money the strike sits, and increased by the premium collected.
Worked example
With AAPL at $308.63, selling one naked $320 call (11.37 points out-of-the-money) for $4.50 in premium: 20% of $30,863 is $6,172.60, minus the $1,137 OTM amount, plus $450 premium = roughly $5,486 in required margin — collected on $450 of premium, a leverage ratio that punishes any sharp move above $320. If AAPL gapped to $340 on an earnings surprise, the seller owes the difference between $340 and $320 per share, or $2,000 per contract, against $450 collected — a loss more than four times the premium, with no cap if the stock kept climbing. A naked $290 put on the same stock (18.63 points OTM) collecting $5.00 premium has bounded but still large downside: max loss is ($290 − $5.00) × 100 = $28,500 per contract if AAPL went to zero, though a move to $270 alone would cost $2,000 against the $500 collected.
When traders use it
Traders sell naked options to collect premium with capital efficiency that a fully collateralized position doesn't offer — margin required is a fraction of the cash a cash-secured put or covered call would tie up, letting one account run more simultaneous positions. It's typically restricted to the highest options-approval tiers brokers offer, since the strategy requires demonstrated experience and sufficient account equity, and it's more common among traders explicitly targeting premium income in range-bound or low-volatility names where a large adverse move is judged unlikely.
Limitations and misconceptions
The uncapped-loss framing of a naked call isn't hypothetical — brokers can and do force-liquidate or demand same-day margin on a fast adverse move, sometimes at worse prices than the trader would have chosen. Naked options carry options assignment risk at any point the option is in-the-money, not just at expiration, particularly around dividend ex-dates for calls. Selling naked isn't a hidden way to access more premium for free — the extra leverage is exactly why the position carries the outsized risk that fully collateralized strategies like the cash-secured put or covered call are structured to cap.