Naked Position

A securities position that is not hedged from market risk. Both the potential gain and the potential risk are greater when a position is naked instead of covered (a covered position is hedged from market risk).

If an investor simply holds 500 shares of Ford, he or she has a naked position in Ford. If the investor wanted to cover this position, he or she could buy put option contracts, which would help protect against downward movements in the price of Ford shares.

Whether to have a naked position is rarely a concern for most small investors, but it is a concern for large investment holders and institutions.