Naked option writing

There are two parties to an option contract – the buyer (holder) and the seller (writer). If you are an option writer, you can be covered or naked.

For example, say you write and sell a call option. This gives the buyer the right to demand shares at a fixed strike price anytime before the option expires. If the option is exercised and you already own the shares as the writer, you are said to be covered.

If, on the other hand, you don’t own the underlying shares and will have to find them should the option get exercised, you are known as a naked writer. The same is true with put options. However, this time the holder has the right to sell you shares at a fixed strike and you have an obligation to buy them.

If you hold the cash needed to pay for them you are known as covered and if you don’t your position is naked. Naked writing is riskier in both cases.

• See Tim Bennett’s video tutorial: What are options and covered warrants?

66% off newsstand price

12 issues (and much more) for just £12

That’s right. We’ll give you 12 issues of MoneyWeek magazine, complete access to our exclusive web articles, our latest wealth building reports and videos as well as our subscriber-only email… for just £12.

That’s just £1 per week for Britain’s best-selling financial magazine.

Click here to take advantage of our offer

Britain is leaving the European Union. Donald Trump is reducing America’s role in global markets. Both will have profound consequences for you as an investor.

MoneyWeek analyses the critical issues facing British investors on a weekly basis. And, unlike other publications, we provide you with the solutions to help you turn a situation to your financial advantage.

Take up our offer today, and we’ll send you three of our most important investment reports:

All three of these reports are yours when you take up our 12 issues for £12 offer today.

MoneyWeek has been advising private British investors on what to do with their money since 2000. Our calls over that period have enabled our readers to both make and save a great deal of money – hence our position as the UK’s most-trusted investment publication.

Click here to subscribe for just £12