A naked option (for example a naked stock option) is written by someone who does not own the underlying asset.
In the case of stock options, the naked call option writer offers to sell shares at a specified price in the future without actually owning any of these shares.
Writers of naked call options (also known as uncovered call options) expect the underlying asset price will not rise. Should they be wrong, they face potentially unlimited losses because there is almost no limit to how high a stock price might rise. The option writer is legally obliged to provide shares to the option holder at the strike price, which can be much lower than the current share price. Losses are enhanced by the leveraged nature of options – a single option usually controls 100 shares.
Naked call writing is one of the riskiest market transactions possible.
When one sells a call option without owning the underlying stock or any equivalent security (convertible stock or bond or another call option), one is considered to have written an uncovered call option. This strategy has limited profit potential and theorically unlimited loss… This fact is not particularly attractive, but since there is no actual cash investment required to write a naked call… the strategy can be operated as an adjunct to many other investment strategies.
Lawrence G. McMillan, Options as a Strategic Investment