The Risk of Selling Naked (Uncovered) Put Options

By Stock Research Pro • January 31st, 2010

A naked put, also known as an “uncovered put” refers to the selling of a put option without having a short position in the stock for which the put was written. A put option gives the owner of that option the right (but not the obligation) to sell a predetermined amount of the underlying security at a set price and within a specified period of time. By having an accompanying short position in that stock, the seller of the put “covers” that contract.

A naked put is typically sold for purely speculative reasons as the seller of the put believes the stock price will stay above the strike price the expiration of the contract. While a naked put offers only a limited gain to the seller, it is a strategy with unlimited risk. If the stock price falls below the strike price before expiration, there is virtually no limit to the loss the seller can incur.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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