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.