Finance: What is a naked option/position?

A naked option isn't as risqueé as it sounds...it's just an option you sell without having enough of the underlying security to cover your butt if the price changes. We suppose you could sell it naked, though...

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Transcript

00:26

that stands on their own but with extreme amounts of risk.....You invest [Man discussing investment in a lake]

00:34

$10,000 in coca-cola stock at 40 bucks a share buying 250 shares the stock goes

00:39

up $2 in a year or 5% not a bad score and you've made a whopping five percent on

00:45

your money or about five hundred bucks you bought the stock not the option and

00:50

remember when you own the stock you can own it forever there's no clock ticking [Clock ticking by]

00:53

in the background like there is with an option okay but let's say you had spent

00:57

that same 10 grand worth of naked coca-cola call options on options with a

01:02

strike price of 42.50 expiring in four months well the stock remains at 42.50

01:08

the whole time doesn't budge well guess what you've lost all of your money [Man with empty jean pockets]

01:13

had the stock under $45 however that 10 grand invested in those call options

01:18

which bought you exposure to some 20,000 shares would have made you something

01:22

like 250 a share that's of in-the-money value on those options times 20,000

01:27

shares or 50 grand yeah way more than your boring experience of just owning

01:33

the stock and making a whopping 500 bucks but you'll also risk losing

01:37

everything and this kind of foot's with whole notion of risk and reward being [Man in between reward and risk]

01:42

married in some unholy alliance where they kind of wrestle and yell at each

01:46

other all the time right so you took a lot of risk in buying

01:49

call options with nothing behind them you bought em naked

01:52

you could have made a fortune but you didn't because he played it safe and

01:55

bought the stock well in reality professional investors rarely just buy

01:59

naked options alone because they are so risky and so volatile but every now and [Ball spinning on roulette wheel]

02:05

then somebody bets the ranch on 22 black it comes up they make 36 times their

02:10

money in a week and everyone asked them for the best way to angle their thumb

02:15

when they're trying to flip a head on a quarter and we actually have a whole

02:18

video on that you should watch it it's kind of depressing...