Naked Put definition

Naked Put refers to writing Put option without having short position in underlying security - a very speculative investment.

For example, say in March ABCD stock is trading at $50. You do not have short position in ABCD stock, but you sell a Naked Put option to buy ABCD for $40 that expires in June. You get $1 when you sell this contract.

If between when you sell the contract and the June expiration ABCD never trades below $40, then you just made a $1 and you don't owe anything.

If ABCD is trading at $20 in May, then you just lost $20. You have an obligation to buy ABCD for $40, but you can only sell it on the open market for $20.

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