Some traders sell naked options to collect maximum premium — and some of them blow up their accounts doing it. This guide explains exactly what naked options are, how naked calls and puts actually work, the real risks, and the more disciplined approach I use instead.
I'm David Jaffee, a former Wall Street investment banker and full-time options trader. I do sell naked options occasionally — but only under one strict condition I'll explain below. For most traders, most of the time, there's a smarter way to collect premium.
Quick Verdict:
- A naked option (or "uncovered" option) is an option you sell without a hedge or an offsetting position — so you collect the maximum premium but carry the maximum risk.
- A naked call has theoretically unlimited risk (a stock can rise forever). A naked put has large but defined-at-zero risk (the stock can only fall to $0).
- The danger shows up in crashes: when volatility explodes, naked sellers can run out of buying power and get forced to close at the worst possible moment — which is what happened to many in March 2020.
- How I trade them: I only sell a naked put when I'd genuinely be happy to own the stock at that strike. Otherwise I trade defined-risk vertical spreads, which cap the downside and protect against black-swan events.
What Is a Naked Option? (Definition)
When a trader sells an option without owning an accompanying position to cover it, they're trading a naked — or "uncovered" — option. The seller collects the premium and takes on the obligation with no offsetting protection.
Contrast that with a covered option (where you own the underlying stock, or a further option, as protection) or a vertical credit spread (where you buy a cheaper option as insurance). With a naked option, there's no insurance — you keep more premium, but you're exposed to the full move against you.
The maximum gain on any short option is the premium you collect, realized if the option expires worthless. As a general practice, I don't hold options all the way to expiration — closing early usually means less risk and better overall returns.
Naked Call Options: Unlimited Risk
If you sell a call without owning the stock (or a higher-strike call as protection), you've written a naked call. Traders do this when they expect the stock to trade below the strike at expiration, so the call expires worthless and they keep the premium.
The problem: a stock's price can rise indefinitely, so a naked call carries theoretically unlimited risk. This is the single most dangerous common options position, and it's why I very rarely sell naked calls. One favorable factor is that stocks tend to rise more slowly than they fall — "the bull takes the stairs up, the bear jumps out the window" — which sometimes gives you time to roll or manage a challenged short call. But "sometimes" is not a risk-management plan when the downside is unlimited.
Naked Put Options: Large but Defined Risk
A naked put is sold when you expect the stock to trade above the strike at expiration. If it does, the put expires worthless and you keep the premium. Your risk materializes if the stock falls below the strike — and in the worst case (the stock going to zero), your loss is the strike price times 100 per contract, minus the premium.
The real-world danger isn't a single large-cap going bankrupt — it's correlation risk during a crash. A few times a year, stocks fall violently. When they do, many short puts go in-the-money at once, volatility spikes, option prices soar, and traders get forced to close positions for a large loss or face a margin call. In March 2020, the S&P 500 fell 36% in 33 days, and many naked put sellers ran out of buying power at exactly the wrong time.
For a real-world example of aggressive put-selling marketed as easy income, see my Investing With Brandon review.
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Naked vs. Covered vs. Spreads: The Real Trade-Off
Position | Premium Collected | Max Risk | Best for |
|---|---|---|---|
Naked put | Highest | Strike price − premium (stock to $0) | Only if you'd happily own the stock at that strike |
Naked call | High | Unlimited | Rarely advisable — unlimited upside risk |
Vertical credit spread | Lower | Width of strikes − premium (defined) | Most traders, most of the time — defined risk |
Covered call | Lower | Stock downside (offset by premium) | Holders of the underlying wanting extra income |
How I Actually Trade Naked Options
Here's my honest rule, and it's simple: I will only sell a naked put if I'm fully prepared to take ownership of the stock at that strike price. If I don't want to own it, I don't sell it naked — I trade a vertical credit spread instead, because the defined risk protects me against violent selloffs.
When I do sell naked, I mitigate risk in a few disciplined ways: I only sell on the highest-quality large-cap names I'd want to own, I sell well out-of-the-money to raise my probability of profit and give myself room to manage the position, and I keep a substantial cushion of available buying power so a volatility spike can't force me into a margin call. I also buy protection — long puts — during calm, low-volatility periods when that insurance is cheap, so my portfolio is hedged before the crash, not after it.
That's the core difference between disciplined premium selling and the reckless version that blows up accounts: the risk is defined and hedged in advance, not managed in a panic. It's the foundation of what I teach — selling option premium with debit-spread hedging (the Financed Bull).
Should You Trade Naked Options?
For most traders — especially anyone with an account under $20,000, or anyone still building experience — the answer is no, or only sparingly. The imbalance of risk versus reward on naked positions (particularly naked calls) makes them hard to recommend as a core strategy. Defined-risk vertical spreads give you most of the benefit of premium selling with a fraction of the tail risk, and they let you sleep at night during a crash.
Naked selling has a legitimate place — taking assignment on a quality stock you wanted anyway can be very profitable — but it's a tool for specific situations, not a foundation to build on. If you want to see how I combine premium selling with defined-risk hedging into a complete, repeatable strategy, that's exactly what my options trading strategies hub and my guide to making a living selling options cover. My returns of approximately +78% and +67% over the past year are backed by real E*TRADE statements on my verified results page.
Strike selection is your first risk decision — here's how to choose the best strike price.
Frequently Asked Questions (FAQs)
What is a naked option?
A naked (or uncovered) option is an option you sell without a hedge or offsetting position. You collect the full premium but carry the full risk if the trade moves against you. Compare this with a covered option or a vertical credit spread, where a stock position or a purchased option limits your maximum loss.
What is a naked call option?
A naked call is a call you sell without owning the underlying stock or a higher-strike call as protection. Because a stock can rise indefinitely, a naked call carries theoretically unlimited risk — the most dangerous common options position. Traders sell them expecting the stock to stay below the strike at expiration.
What is a naked put option?
A naked put is a put you sell without a lower-strike put as protection. You're obligated to buy the stock at the strike if assigned, so your maximum loss is the strike price minus the premium (if the stock goes to zero). Sold correctly on a stock you'd want to own, it's a way to get paid while waiting to buy shares at a discount.
Are naked options risky?
Yes — particularly if you trade too large or the market moves violently. In March 2020 the market fell 36% in 33 days, and many naked sellers ran out of buying power and were forced to close positions at the worst possible time. Naked calls are riskiest because their loss potential is unlimited.
What are uncovered options?
"Uncovered" is another word for naked — an option sold without a hedge. Uncovered sellers collect more premium but assume more risk than traders using covered positions or spreads.
What is the difference between a naked and a covered option?
A covered option is protected — either by owning the underlying stock (covered call) or by buying an offsetting option (which turns it into a spread). A naked option has no such protection, so it collects more premium but exposes you to a much larger potential loss.
How do you manage the risk of selling naked options?
Sell only on high-quality large-cap names you'd want to own, stay well out-of-the-money to raise your probability of profit, keep a substantial buying-power buffer so a volatility spike can't trigger a margin call, and buy protective options during calm, low-volatility periods. Better still for most traders: use defined-risk vertical spreads so your maximum loss is capped from the start.
Should beginners sell naked options?
Generally no. Beginners are far better served by defined-risk vertical credit spreads, which limit the maximum loss on every trade. Naked selling should wait until you have the experience, account size, and discipline to manage the tail risk — and even then, only on stocks you'd genuinely want to own.
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