Dear all,
Can I say that, if the question does not mention anything special in relation to the call/put options under consideration, I can make the assumption that both the call and put are naked?
Thank you.
Cheers,
Ernest
Yes.
A naked option is a call or put written by the investor who does not own a position in the underlying asset that locks in the cost of delivering the shares if the option holder exercises the option . Trading in naked options is highly risky.
I may be putting on my Captain Obvious hat here, but in general, only assume information that’s in the question. If all they tell you is that it’s a call, that’s all you can assume. If there’s some combination of an option and some other thing (like a covered call, for instance), there’ll be an indication in the question.
Like I tell my students, RTFQ (i.e. Read The “Full” Question).
But you didn’t explain what a naked option is, nor whether trading them is highly risky or not.
(As an aside, why don’t we ever describe anything as being _ lowly _ risky (as opposed to highly risky)?)
ouch
I believe a naked option is what we used to hope for at my college alma mater on a Friday or Saturday night. I don’t know how risky they were, but they generaly had pretty good payoffs.
Ernest, definitely read the question and hopefully you will have time to understand options more during your studies.
A naked option is not when you buy/long/own an option contract. Some people think it is since they do not own any underlying to cover themselves. But longing the option gives you the power to exercise it, not the other way around.
It is naked only when you sell/short an option. The option seller has an obligation to fulfill, if she does not hold the underlying security to cover this, then it becomes naked. For example, selling a call without longing the stock, or selling the put without having shorted the stock.