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What Is A Naked Short?

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Earlier this week, the CEO of Overstock.com (OSTK) moved forward with his $3 billion lawsuit against major Wall Street banks for so called "naked shorting" his stock. But what exactly is a "naked short"?

Dylan Ratigan took to the streets of New York City to see what average people think the phrase "naked short" means. Most of the crowd he spoke with didn’t know.

Dylan says fundamentally, a naked short is a bet that a stock is going down – without the money to back it up.

Here’s the definition of naked short selling provided by the SEC: In a "naked" short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period. As a result, the seller fails to deliver securities to the buyer when delivery is due; this is known as a "failure to deliver" or "fail."

Jon Najarian says it’s not illegal yet, but it might be soon.

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Trader disclosure: On July 20th 2007, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders;Macke Owns (SWY), (INTC); Jon Najarian Owns (RDC), (AAPL); (AMD); (CHL); (CLX); (CME); (F); (JNPR); (NKE); (SWY) (ZMH), (RDC);Jon Najarian Is Short (BX); Seymour Owns (AAPL); (BP); (GLD); (F); (INTC); (YHOO); Pete Najarian Owns (CLX); Seymour Owns (MSFT), (SWC), (HAL), (SLB), (BX); WWE Programs Air On Networks Of NBC Universal, The Parent Company Of CNBC; CNBC Is A Service Of NBC Universal And Dow Jones; Red Star Asset Management Is Short (XOM)