Naked Writer
Categories: Derivatives, Trading
See: Naked Option. See: Naked Call. See: Naked Put.
The group of people you’d least like to see naked. Wake us up when we get to the term “Naked Olympic Volleyball Player.”
Besides being the least searched term on Pornhub, “naked writer” applies to a situation in the options market. Specifically, it applies to someone who sells an option (that is, writes an option contract) but doesn’t own the underlying asset or hold an appropriate hedge.
You purchase an option to buy 300 shares of AMZN stock at $1,900 a share, expiring in two months. The other end of that option involves a party writing the contract. They have agreed to sell you those 300 shares of AMZN at $1,900 if you exercise your option two months from now.
If the person selling that option doesn't own 300 shares of AMZN, they are said to be a "naked writer." They are writing the contract without possessing the underlying asset they just agreed to sell. Think: unhedged, nakedly exposed seller of an option.
The goal of the naked writer is to earn money through the sale of the options contract. They are hoping you don't exercise your option. If AMZN shares are trading at $1,850 at the expiration date, the naked writer wipes the sweat from their brow and does a happy dance around their office. Hopefully clothed.
Related or Semi-related Video
Finance: What is a naked option/position...7 Views
Finance a la shmoop what is a naked option or naked option position? alright
warning you're going to be disappointed in this video it's not nearly as hot as [Censored man jumps into lake]
you probably hope naked options are just options that you sell or buy without
having enough of the underlying security to cover your if the price changes in
the wrong direction all right well they're an investment
that stands on their own but with extreme amounts of risk.....You invest [Man discussing investment in a lake]
$10,000 in coca-cola stock at 40 bucks a share buying 250 shares the stock goes
up $2 in a year or 5% not a bad score and you've made a whopping five percent on
your money or about five hundred bucks you bought the stock not the option and
remember when you own the stock you can own it forever there's no clock ticking [Clock ticking by]
in the background like there is with an option okay but let's say you had spent
that same 10 grand worth of naked coca-cola call options on options with a
strike price of 42.50 expiring in four months well the stock remains at 42.50
the whole time doesn't budge well guess what you've lost all of your money [Man with empty jean pockets]
had the stock under $45 however that 10 grand invested in those call options
which bought you exposure to some 20,000 shares would have made you something
like 250 a share that's of in-the-money value on those options times 20,000
shares or 50 grand yeah way more than your boring experience of just owning
the stock and making a whopping 500 bucks but you'll also risk losing
everything and this kind of foot's with whole notion of risk and reward being [Man in between reward and risk]
married in some unholy alliance where they kind of wrestle and yell at each
other all the time right so you took a lot of risk in buying
call options with nothing behind them you bought em naked
you could have made a fortune but you didn't because he played it safe and
bought the stock well in reality professional investors rarely just buy
naked options alone because they are so risky and so volatile but every now and [Ball spinning on roulette wheel]
then somebody bets the ranch on 22 black it comes up they make 36 times their
money in a week and everyone asked them for the best way to angle their thumb
when they're trying to flip a head on a quarter and we actually have a whole
video on that you should watch it it's kind of depressing...