What is uncovered or naked options trading?

Uncovered Options trading is a strategy when you sell an Option without holding any position in the underlying. It is also called naked options trading. The trader sells an Option without having the shares of the underlying.

An uncovered or naked Option strategy is inherently risky as there is limited profit potential but significant loss potential. The maximum profit in an uncovered Put Option is when the price of the underlying closes above the strike price on expiry. The maximum loss is when the underlying price falls down to zero. So higher the strike price, higher is the potential for losses. For an uncovered Call, maximum profit is when the underlying price falls to zero whereas maximum loss is unlimited and depends on how high the underlying closes above the strike price.