Naked Shorting
Categories: Derivatives, Trading
See: Naked Option. See: Naked Put. See: Naked Call.
Anything done naked on Wall Street is risky, exposed, unhedged. So a naked short is just like any other short, i.e. you sell a stock at $52.87, betting the stock will go down meaningfully enough to more than cover the borrow, or the interest rate you'll have been charged by the bank for borrowing those shares you don't own to sell.
Most professionals don't do things naked (and for good reaso; they like pizza). So a naked short is just a short with no paired long or other derivative intstrument attached. Like, one rational trade would run such that you think MSFT with its cash horde will go up relative to NASDAQ. So you buy MSFT long, and then you short QQQQ (representative liquid index fund that hedgies use all the time for this kind of trade). Then you're just betting that, even if MSFT goes down in a horrible day, it might go down 2%, while QQQQ goes down 5%. So you pick up 300 basis on the spread (less borrow costs, of course).