Naked Option refers to an options trading strategy where the trader sells options without holding a corresponding position in the underlying asset. This means the trader has not purchased or shorted the stock or index related to the option contract. Naked options are considered high-risk strategies because the potential losses can be unlimited if the market moves unfavorably.

In a naked call option, the trader sells a call without owning the underlying asset. If the price of the asset rises sharply, the seller may face substantial losses since they are obligated to deliver the asset at the strike price. Similarly, in a naked put option, the trader sells a put without holding cash or margin to buy the asset if assigned, leading to large losses if the price falls significantly.

This strategy is generally used by experienced traders who have a strong view on market direction and are willing to assume high risk for potential premium income. However, due to the unlimited loss potential and margin requirements, naked options are not suitable for conservative investors or beginners. SEBI and exchanges require traders to maintain sufficient margin to cover potential losses and discourage excessive leverage in such trades.

In practice, traders often prefer covered options or hedged positions to manage risk more effectively. By holding the underlying asset or using offsetting positions, they can limit downside exposure while still earning option premiums.

In summary, a naked option offers the opportunity to earn premium income but comes with significant financial risk. Understanding margin requirements, market volatility, and risk management is essential before employing this strategy in options trading.