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Definition of Uncovered

Uncovered is the sale of a call option without owning the underlying security or the sale of a put option without being short the stock or having cash on deposit that is sufficient to purchase the underlying security.

Applying "Uncovered" to Securities Exams:

Selling uncovered options is the most speculative type of option trading. Only the most sophisticated and most well capitalized investors should consider such a strategy. The maximum gain from the sale of an uncovered option is the premium received. In the case of an uncovered call option the maximum loss is unlimited as there is no limit to how high a stock price may go.

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