Naked Options for Beginners: Managing Risk, Margin, and Assignment
Education only. Options involve risk. Not investment advice.
TL;DR
Naked options means selling calls or puts without owning the underlying stock or having a hedge. You collect premium upfront, but your risk can be enormous — theoretically unlimited on naked calls. Margin isn’t a safety net; it’s borrowed money that amplifies losses. Most beginners shouldn’t trade naked options. Vertical spreads offer similar income with capped risk.
What “Naked” Actually Means
A naked option is one you sell without protection.
When you sell a naked call, you’re agreeing to deliver 100 shares at the strike price if assigned — but you don’t own those shares. If the stock rallies, you have to buy them at market price to fulfill your obligation. There’s no ceiling on how much that can cost.
When you sell a naked put, you’re agreeing to buy 100 shares at the strike price if assigned — and you haven’t set aside the cash or a hedge to cover it. If the stock crashes, you’re buying at a price far above market value.
The appeal is the premium you collect upfront. Naked options pay more than spreads because you’re absorbing more risk. If the option expires worthless, you keep everything. If it doesn’t, things get expensive fast.
Naked vs. Covered: Risk Comparison
| Strategy | Protection | Max Loss | Margin Required | Broker Level |
|---|---|---|---|---|
| Covered Call | Own 100 shares | Limited (stock to $0) | Stock cost | Level 1 |
| Cash-Secured Put | Cash in account | Strike × 100 | Strike × 100 | Level 1-2 |
| Naked Put | None | Strike × 100 (minus premium) | 20-25% of stock value | Level 4 |
| Naked Call | None | Unlimited | 20% + premium + OTM amount | Level 4 |
The Margin Trap
Brokers require margin to open naked positions. This is not the amount you could lose — it’s the collateral the broker holds. The actual risk is much higher.
A typical naked put on a $100 stock might require $2,000 in margin. But if the stock drops to $50, you’ve lost $5,000 minus whatever premium you collected. The margin number is misleading. It makes the trade feel smaller than it is.
Naked calls are worse. If you sell a $100 call for $2.00 and the stock gaps to $150 on a buyout announcement, you owe $50 per share — $5,000 — minus the $200 premium. And the stock could have gone higher. Margin doesn’t cap this. It just makes it possible to get into the position in the first place.
Margin Calculation Formulas
Brokers use different formulas, but here’s a common approach:
Naked Put Margin = Greater of:
- 20% of stock price − OTM amount + premium
- 10% of strike price + premium
Naked Call Margin = Greater of:
- 20% of stock price + premium − OTM amount
- 10% of stock price + premium
Margin Example: Naked Put
Stock at $100, you sell the $95 put for $2.00:
| Calculation | Formula | Result |
|---|---|---|
| OTM amount | $100 − $95 | $5.00 |
| Method 1 | (20% × $100) − $5 + $2 | $17.00 |
| Method 2 | (10% × $95) + $2 | $11.50 |
| Margin required | Greater of methods | $1,700 per contract |
But if the stock drops to $70, your loss is $25 per share ($2,500) minus the $200 premium = $2,300 actual loss — well beyond the margin.
Max Loss Is Not a Concept Here
With defined-risk strategies like spreads, you know your max loss before entering. With naked options, max loss is either extremely large or literally unlimited.
For a naked put, the worst case is the stock going to zero. Sell a $100 put and watch the company go bankrupt — you’re buying worthless shares for $10,000 minus premium. Rare, but possible.
For a naked call, the worst case has no ceiling. Stocks can double, triple, or squeeze to absurd levels. GameStop, AMC, and a dozen other examples show what happens when short sellers get caught in a runaway rally. Those traders were on the hook for multiples of their original position value.
When Assignment Becomes a Problem
Early assignment can happen anytime an option is in the money, especially before dividends or when extrinsic value is low.
If you’re assigned on a naked put, you have to buy 100 shares at the strike. If you don’t have the cash, your broker liquidates other positions or puts you on margin with interest.
If you’re assigned on a naked call, you have to deliver 100 shares. If you don’t own them, your broker shorts them for you, creating a short stock position with unlimited upside risk. You’re now short the stock and praying it goes down.
This is why naked strategies are reserved for experienced traders with large accounts and robust risk management. One bad trade can blow through an account in hours.
Robinhood Does Not Allow Naked Options
This is the most important thing to know if you’re on Robinhood: you cannot trade naked options.
Robinhood’s maximum options approval is Level 3, which allows spreads but not naked calls or puts. The platform explicitly prohibits naked strategies because of the unlimited loss potential.
If you want high-probability income strategies on Robinhood, you’re limited to credit spreads, cash-secured puts, and covered calls. All of these have defined or at least bounded risk.
Credit spreads are the closest alternative. You still collect premium by selling an option, but you buy another option at a different strike to cap your loss. The premium is smaller, but so is the disaster potential.
If you specifically want to sell naked options, you need a different broker.
Tradier Allows Naked Options — With Conditions
Tradier offers Level 4 options approval, which permits naked puts and calls. But the requirements are steep.
Tradier Level 4 Requirements
| Strategy | Minimum Equity | Account Type | Experience Required |
|---|---|---|---|
| Naked Puts | $10,000 | Margin | Demonstrated trading history |
| Naked Calls | $50,000 | Margin | Significant options experience |
| Naked Index Options | $100,000 | Margin | Advanced trader qualification |
The margin requirements are calculated dynamically based on the stock price, premium, and distance out of the money. Getting approved requires a margin account, demonstrated trading experience, and acknowledgment of the risks involved. Tradier isn’t handing out Level 4 to beginners.
Once approved, you can sell naked puts and calls with margin calculated in real time. As the position moves against you, margin requirements increase — which can force you to close or add funds. This isn’t a set-and-forget strategy.
Tradier Features for Naked Options
- Real-time margin calculations: See exactly how much collateral is required before placing the trade
- Dynamic margin updates: Margin requirements adjust as positions move in/out of the money
- API automation: Build scripts with automated stop losses at defined loss thresholds
- Conditional orders: Set OCO (one-cancels-other) orders to automate profit targets and stop losses
Tradier’s API allows programmatic naked selling, which is useful for systematic strategies. You can build scripts that close positions at defined loss thresholds rather than relying on manual intervention.
Why You Probably Shouldn’t Trade Naked
Naked options are high-risk, moderate-reward trades. You win often, but when you lose, you lose big.
The premium you collect is compensation for the risk you’re taking. If the expected value were positive, the market would have priced it away. Over time, the losers catch up with the winners.
Position sizing is extremely difficult. If you can’t define your max loss, you can’t size appropriately. A single gap — an earnings miss, a takeover announcement, a macro shock — can wipe out months or years of premium collected.
Psychologically, naked selling is hard to manage. Winners feel slow and losers feel fast. You sit through endless small gains, then watch one position explode and give it all back. That’s demoralizing even when it’s expected mathematically.
The Safer Alternative: Vertical Spreads
If you want to collect premium without unlimited risk, sell credit spreads instead of naked options.
A credit spread involves selling one option and buying another at a different strike for protection. You collect less premium, but your max loss is capped at the width of the spread minus the credit.
For example, instead of selling a naked $95 put for $2.00, you could sell the $95 put and buy the $90 put for $0.50, netting $1.50. Your max loss is now $350 instead of $9,500.
You give up some premium in exchange for sleeping at night. For most traders, that’s a trade worth making.
If You Must Trade Naked
If you’re going to sell naked options anyway, here are the baseline rules.
Set a loss limit before entering. A common rule is to close if the loss reaches 2x the premium received. If you collect $200, close at $400 loss rather than waiting for max pain.
Avoid earnings and dividends. The gap risk is too high. One overnight move can blow through any mental stop you’ve set.
Track exposure across all positions. If you’re short five naked puts on different stocks, you’re not diversified — you’re correlated to a market selloff. Know your total max loss at all times.
Use alerts. Don’t rely on checking your account manually. Set price alerts on the underlying and be ready to act fast.
Size conservatively. A 2% risk rule is meaningless when max loss is undefined, but you can still limit your notional exposure. If you wouldn’t be comfortable owning the stock or covering the call at any price, you shouldn’t be selling the option.
Final Thought
Naked options are not inherently bad — they’re just high-risk. Professional traders and market makers use them all the time, but they do so with institutional-grade risk management, capital, and hedging.
Retail traders often underestimate the tail risks and overestimate their ability to react. The premium feels like free money until it isn’t.
If you’re considering naked options, make sure you understand the worst case, not just the expected case. And ask yourself honestly whether the premium you’re collecting is worth the risk you’re taking.
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Disclaimer: This is education only. Options trading involves significant risk and is not suitable for all investors. Consult a financial advisor before trading.