Undefined risk
Definition · Level 4 · Naked options
Keep reading with Tradecraft
Without an account, you can read three definitions every 30 days. Tradecraft explains all 738 terms and strategies, with the lessons that teach them, flashcards that come back before you forget, quizzes and a payoff lab.
Exposure with no long option or stock capping the loss: unlimited for a naked short call (every dollar above the strike is lost) or short-stock-like position; large but bounded by the strike for a naked put.
Example
Short the 45 call for 0.80, no shares: a takeover at 60 costs $1,420 per contract.
Where Tradecraft teaches it
Level 4 · Naked options, in the lesson “What undefined risk means”: The top tier of this course’s approval ladder, and why these trades have no worst case you can fully write down.
Related terms
- Naked optionA short option with no stock position or long option offsetting it; also called uncovered.
- Short Naked CallSell a call without owning the stock or a higher call.
- Blow-upLosing all or most of an account in a single event, usually from oversized short-vol or leveraged positions.
- Calendar Spread – CreditBuy the near-term option and sell the longer-term one at the same strike.
- Delta hedgingTrading the underlying (or futures) to offset a position’s delta so small moves barely change P&L, leaving gamma, theta and vega; it must be redone…
- Diagonal Spread – Long leg expires firstBuy a near-term option and sell a longer-term one at a different strike.