The term naked put refers to a strategy in which the writer of a put option does not own the underlying securities outlined in the contract. Naked puts are considered an advanced options strategy, since they carry considerable risk, which is only second to naked calls.
The seller of a put option is referred to as the writer. They are obligated to buy the securities from the holder of the put option if they exercise their right. The buyer of a put pays a fee, known as a premium, to own the right to exercise their option. If the seller of a put does not own a corresponding amount of the underlying security, the option is said to be "naked," which means the seller will have to purchase shares on the open market if the buyer decides to exercise their option.
Generally, the buyer of a put option is bearish on the security, since they believe its price will decrease over time. The writer of the option has a bullish or neutral view in the case of a put. A naked put is considered a very risky option, since the writer is exposed to considerable losses.
There are two possible outcomes when writing a naked put: