What does "selling naked" in finance refer to?

In finance, "selling naked" refers to a trading strategy where an investor sells options without holding the underlying asset. This means that the seller does not own the stock that they might be obligated to deliver if the option is exercised. This approach can lead to significant risk because if the market moves against the position, the seller could be required to buy the stock at a higher market price to fulfill the option contract, potentially leading to substantial losses.

This strategy is often associated with selling naked call options, where the seller bets that the stock price will not exceed the strike price of the option. If it does, they must buy the stock at market prices to fulfill their obligation, which they didn't anticipate having to own. Therefore, selling naked emphasizes the risk and potential for high rewards in the options market, making it a crucial concept in personal financial management and investing.