Explain the Difference between Selling a “Naked” OTM Option and a “Covered” OTM Option

Selling a "naked" OTM option means the seller does not own the underlying asset, exposing them to theoretically unlimited loss. Selling a "covered" OTM option (e.g. a Covered Call) means the seller owns the underlying asset, which acts as collateral.

This ownership "covers" the obligation, limiting the maximum loss to the cost of the underlying asset (minus the premium received).