How Does a “Naked” Option Position Expose a Trader to Unlimited Intrinsic Value Risk?
A naked option position, typically a short call or a short put without a hedge, exposes a trader to unlimited intrinsic value risk. For a short call, if the underlying price rises indefinitely, the intrinsic value (Underlying Price – Strike) grows without limit, resulting in an unlimited loss.
The short put has a limited, but very large, risk as the underlying price can only fall to zero.
Glossar
Underlying Price
Asset ⎊ The underlying price, within cryptocurrency derivatives and options trading, represents the current market value of the reference asset upon which a derivative contract is based.
Naked Short Put
Mechanism ⎊ A naked short put, within cryptocurrency derivatives, represents the sale of a put option without the prior borrowing or existence of the underlying asset for potential delivery, creating an uncovered position.
Naked Short
Framework ⎊ The concept of a "naked short" within cryptocurrency derivatives, particularly options and perpetual futures, represents a structural vulnerability distinct from traditional equities markets.
Intrinsic Value
Valuation ⎊ This represents the in-the-money amount of an option, calculated as the difference between the spot price and the strike price, if positive, otherwise zero.
Naked Short Call
Definition ⎊ ⎊ Naked Short Call describes the speculative derivative strategy where a trader sells a call option without owning the underlying cryptocurrency asset or holding a corresponding short position to cover potential assignment.
Naked Option
Exposure ⎊ The term "naked option," within cryptocurrency derivatives, denotes an options position lacking an offsetting hedge.