Naked Put definition wrong at Wikipedia?

[thecoder]

Wikipedia describes Naked Put as follows ( https://en.wikipedia.org/wiki/Naked_put ):

A naked put (also called an uncovered put) is a put option contract where the option writer (i.e., the seller) does not hold the underlying position, in this case a short equity position, to cover the contract in case of assignment.

I don't get it! If the Put writer loses (ie. spot falls below strike) then he has to buy the underlying at the strike price.
So, then why does the above definition talks of "uncovered" and also of a "short position"?
Isn't the above definition illogical/wrong?

 

[Robert Morse]

The description is correct.

 

[thecoder]

Example:
At start: Spot=$100, Strike=$100 (fix)
At end: Spot=$90
Now the Put buyer made a profit of $10, so he has the right to sell the underlying stock to the Put writer for the strike price of $100 (ie. he just buys it in the mkt for $90 and sells it to the Put writer loser for the agreed upon strike of $100). Ie. the Put writer has the obligation to buy it.

So, then IMO the above wiki definition does not reflect this very reality...

 

[Robert Morse]

The definition describes the option sale at the time it is sold. It does not look one second into the future. At that time, it is naked and uncovered.

So, IMO the above wiki definition does not reflect this reality...

 

[thecoder]

There were more replies here, at least from 2 other people, but they suddenly vanished. What happened?

 

[thecoder]

The definition describes the option sale at the time it is sold. It does not look one second into the future. At that time, it is naked and uncovered.

Thanks, but it seems it's not my day today as I don't understand your reasoning :-(
I just mean the settlement procedure at the end on the expiration day (ie. using European-style options to keep it simple).

 

[stepandfetchit]

Wikipedia content is excellent info!
Agree with Robert here.
Naked vs Covered: For Calls, think long position and short call (for covered call), for Puts, think short position and short put (for covered Put).
For Naked: thiink short call, no long position for naked Call; think short Put, absence of short position(underlying) for naked Put. -- Wikipedia does much better job than I.

 

[thecoder]

Wikipedia content is excellent info!
Agree with Robert here.
Naked vs Covered: For Calls, think long position and short call (for covered call), for Puts, think short position and short put (for covered Put).
For Naked: thiink short call, no long position for naked Call; think short Put, absence of short position(underlying) for naked Put. -- Wikipedia does much better job than I.

Thanks for the clarification.
So, in the Covered Call and Covered Put cases the risk is already fully covered.
But what about the "Cash Covered Put" case? Since the spot of the underlying varies, then I wonder how this type works, and whether it too has the "risk is already fully covered" guarantee?

And in the "Covered Put" case I wonder how the "settlement" process works if the writer side loses: I think the Put buyer just buys cheaply the stock and sells it to the writer with profit.
But since the writer has Short Call plus Short Stock then I wonder what transactions are done...

 

[JSOP]

Wikipedia describes Naked Put as follows ( https://en.wikipedia.org/wiki/Naked_put ):

I don't get it! If the Put writer loses (ie. spot falls below strike) then he has to buy the underlying at the strike price.
So, then why does the above definition talks of "uncovered" and also of a "short position"?
Isn't the above definition illogical/wrong?

An easy way to remember about covering for short option is this: "Covering" is always the opposite of what the option assignment is going to be. For short calls, the call assignment is to sell the underlying of the option, then covering for the short call options would be long the underlying. For short puts, the call assignment is like you said, to buy the underlying of the option, so covering for the short call options would be short the underlying.

Think of this way, whenever an option shorter is getting assigned, he/she must be screwed because he/she is being forced to buy/sell the underlying above/below the market price. For put shorters, he/she is being forced to buy the underlying above the market price then he/she is automatically losing money and would be losing more if the underlying's price goes even lower (I mean that's the reason why the put buyer was exercising the put in the first place, is to be able to force the put writer to buy the underlying that's tanking) so if he/she was already short the underlying at hopefully a previously higher price, then the put shorter would be able to close the short underlying position at a profit or at least be able to get rid of the long position in the underlying before the underlying's price deteriorates further.

 

[JSOP]

Thanks for the clarification.
So, in the Covered Call and Covered Put cases the risk is already fully covered.
But what about the "Cash Covered Put" case? Since the spot of the underlying varies, then I wonder how this type works, and whether it too has the "risk is already fully covered" guarantee?

"Cash covered put" is a totally different concept. It means you have enough cash on hand to buy the underlying or settle the difference between the market and the strike for European options upon assignment for the put vs somebody who doesn't and had to rely on margin to pay for the underlying or settle the difference. Has nothing to do with risk covering. The risk is still going to be there in the case you bought the underlying at higher than market price upon assignment for the put.

And in the "Covered Put" case I wonder how the "settlement" process works if the writer side loses: I think the Put buyer just buys cheaply the stock and sells it to the writer with profit.
But since the writer has Short Call plus Short Stock then I wonder what transactions are done...

If the put writer has short calls, he/she will just get all of the premiums from selling the calls, nothing happens. And then once and if he/she got assigned on the short put, it will just close the short stock position since he/she's bought the stock upon assignment.