I understand that holding short positions in naked options is risky because they are not backed by cash or stock in a brokerage account. I've noticed that some brokers allow the selling of naked puts but not naked calls. Why is that?

  • It's simply because one can do "infinitely" badly; the other has a limit on how bad it can get.
    – Fattie
    Apr 29, 2020 at 14:28
  • I understand that holding short positions in naked options is risky because they are not backed by cash or stock in a brokerage account. That statement is completely wrong. Naked options have a Reg T margin requirement that requires* that the trader maintain with cash or marginable securities. Sep 29, 2020 at 2:32
  • @BobBaerker How much cash or marginable securities?
    – Flux
    Sep 29, 2020 at 2:46
  • it depends on what the underlying is. Google "CBOE Margin Manual" Sep 29, 2020 at 11:34

2 Answers 2


A stock can only lose ~100% of its value on the downside, so while the risk is high it is effectively capped and definable selling naked puts as you can't go lower than zero on equities. Selling naked calls opens you to potential infinite risk as stocks can easily rise 100s (if not 1000s in some case) of percent higher from where they currently are.

Compare the risk profile of selling the INO $10 call with potentially infinite max risk: enter image description here

With the risk profile of selling the $10 put, where you have a clear and definable max risk if the stock goes to zero: enter image description here

If you're a broker the naked put sellers are as a result easier to work with in terms of risk modelling due to this cap on losses.


There are 4 levels of option trading approval:

  • Level 1 – Covered Calls & Cash-Secured Puts

  • Level 2 – Long Options

  • Level 3 – Option Spreads

  • Level 4 – Naked Calls & Puts

Because a naked call has the potential for greater loss than a naked put, some brokers split Level 4 above into two levels:

Level 4 – Naked short puts

Level 5 – Naked short calls

  • 2
    Where do these "levels" come from? Are these levels specified by a specific regulatory authority?
    – Flux
    Apr 29, 2020 at 4:26
  • I would assume that it's a brokerage industry requirement since there is some variation at the upper levels (4 levels versus 5 levels) although the SEC does make mention of them. Apr 29, 2020 at 5:17
  • 1
    The SEC page you linked to contains the answer: "Broker-dealers generally offer 5 levels of option trading representing varying degrees of risk. Level 1 generally represents the lowest level of risk, while level 5 generally represents the highest level of risk. The types of option trading that occurs at each level and even the number of levels may vary among brokerage firms."
    – Flux
    Apr 29, 2020 at 6:42
  • 2
    This is circular logic; the question is asking why the various strategies are assigned relative levels of risk. Apr 29, 2020 at 7:47
  • 1
    OK, SEC rules are effectively irrelevant for >95% of the world's population. But what does that have to do with approval levels that brokers have established for regulating what option strategies clients can trade in the USA? Apr 29, 2020 at 14:06

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