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Finance GlossaryNaked Option
Naked Option
Definition of Naked Option
Naked Option refers to an options position where the seller does not hold the underlying asset or a hedging position. This exposes the trader to potentially unlimited losses if the market moves sharply against the position. Naked options are generally considered high risk and are used by experienced traders only.
Related Terms
Negative Correlation
Negative Correlation describes a relationship between two assets where they move in opposite directions. When one increases in value, the other tends to decrease. In finance, it is often used to reduce portfolio risk by combining assets that do not move together. An example is gold and equity market.
Basis Trading
Basis trading means futures trading strategies that use the difference between the spot price and the futures contract price of a stock or commodity.
The difference between the spot and futures prices forms the “basis” for the trading strategy. Hence the name basis trading. These are the two ways in which a trader may use the basis:
The difference between the spot and futures prices forms the “basis” for the trading strategy. Hence the name basis trading. These are the two ways in which a trader may use the basis:
- Short the basis : Done if the price difference or basis is expected to reduce
- Long the basis :Done if the price difference or basis is expected to increase
Modified Duration
In fixed income, Modified Duration is a measure used to estimate the sensitivity of a bond’s price with respect to changes in interest rates. It shows the approximate percentage change in a bond’s price for a 1% change in yield, helping investors assess and manage interest rate risk.
Position Sizing
Position Sizing is a risk management technique for market participants to decide the number of units (shares, futures contracts, or option lots) of a specific security to buy or sell. The main objective is to restrict the potential amount of loss from any single trade to a small percentage of the overall trading capital (e.g., 1% or 2%). Traders use position sizing to ensure that even if a trade goes against them, the loss won't significantly damage their overall capital.
Notional Value
Notional Value refers to the total value of an underlying asset represented by a financial contract, such as derivatives or futures. It is used to calculate exposure and risk, even though the actual amount invested or exchanged may be much smaller than the notional value itself.
Consolidated Financial Statements
A consolidated financial statement is a record of all the assets, liabilities, income, expenses, and other financial data of a company and its subsidiaries.
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