I'm sure you've heard it time and time again: "When E. F. Hutton talks, people listen." That is the message that Hutton, that nation's second largest brokerage firm (with a national network of 3,500 brokers), is shouting all over the place in its hot pursuit of more customers.

Well, Iris Smith, an ailing, 76-year-old widow, listened. And if you could talk to her -- I've changed her name to protect her identity -- she undoubtedly would tell you that the folks at Hutton are the very last people you would want ot listen to for sound investment advice. Judging from her abominable experience -- a reflection of the brokerage business at its worst in supervising a customer's account -- Smith's words would be hard to ignore. Hutton didn't take her to the cleaner, but it made a good stab at it.

In a period of just eight months -- from June 1, 1978, to Jan. 31, 1979, -- Smith, who was hospitalized part of the time, suffered a loss of nearly $214,000 in one of the wildest and riskiest investment vehicles around: naked options.

An option, which is speculative enough, is simply a call on 100 shares of a company's stock at a specific price within a specified period of time. When you sell an option naked (which is what Smith's broker was doing at a hectic pace), you do not own the underlying stock -- which you're betting will go down. To sell an option naked, you have to maintain in your brokerage account the equivalent of 30 percent of the underlying value of the security.

What makes this game so dangerous is that you can get slaughtered in the event of a rising stock price. For starters, the upside potential of the security is unlimited, subjecting the seller of naked options to repeated margin calls to maintain the investment if the game goes against him. Further, if the stock does go up, the seller can face a big additional expense: He or she can be called upon to go out and buy the stock and deliver it. Clearly this is not what investing for widows is all about.

Hutton apparently doesn't agree. A broker in its San Francisco office, Lauren Obley, sold 159,000 stock option calls for Smith in the eight-month period. And of this number, 113,000 would you believe, were in Bally Mfg. Co., the kingpin of the slot machine business and a highly volatile stock. This speculative filing on just Bally alone produced losses of nearly $189,000. There wee also fair-sized losses in the options of Polaroid, Teledyne and Storage Technology.

Obley, by the way, wasn't a total flop. During the eight months, he did manage to achieve some profits for Smith in naked options -- $5,171.20, to be precise. But these were more than offset by the staggering losses of $218,864.90.

An understandably unhappy Smith, contending that the options trading in her account was unsuitable, is seeking damages from Hutton through an arbitration hearing at the New York Stock Exchange.

In a letter sent to the exchange, she noted she was in poor health and hospitalized during part of the eight-month trading period; she suffered severly from emphysema. Because of the increasing volume of options transactions (a brisk 145 during those eight months) and poor eyesight, she was unable to keep her records up to date, Smith said. And it was not until her accountant did her income tax returns this March that she realized the actual loss on the stock options trading and the amount of brokerage commissions.

In all of 1978 -- a year in which Smith lost of $51,255 in options trading (the remaining loss took place in January 1979) -- Hutton raked in commissions of $37,480.

In her lettter to the exchange, Smith -- who, I was told, was too ill to talk to me -- alleged that her account was churned ( a reference to a lot of buying and selling activity to achieve more commissions). She contended that Hutton didn't supervise Obley properly and further alleged that she did not authorize the options trades in her account -- which was nondiscretionary. She said that Obley didn't even return her calls when she sought an explanation of his trades.

Smith has had an accont with Hutton since 1974. And Obley told me that she is an extremely knowledgeable investor and had approved all the options trades. Obley wouldn't go beyond that, pointing out that the matter is in litigation. However, he did say -- in what has to be the understatement of the year by a Hutton broker -- that he didn't consider himself an expert on options.

Then why the hectic options trading in Smith's account? I asked.

He wouldn't reply, referring me to Hutton's attorney.

No one, incidentally, is going to have to take up a collection for Smith. Her net worth -- even after the Hutton fiasco -- stands at about $600,000. And that in itself raises a nagging question. The options trading made no sense from a tax standpoint, her attorney, Lee Van Patten, explained. Even if she made money, she's be a loser -- giving most of it back to Uncle Sam because of her very high tax bracket. And if she lost money, she could deduct only a maximum loss of $3,000 against her income. "Hutton's judgment was appalling," said Van Patten.

Smith's accountant, Stuart Jenkins, told me that Obley had also put herinto commodity trading, another risky speculative game. In the options trading, Obley "was shooting craps," Jenkins said. "He'd lose, double up, lose, and then double up again." Jenkins also insisted that Obley was churning the account, noting the he had pushed Smith into selling her Homestake Mining shares (at a sizable profit) in early 1978 -- a stock which she had bought on her own in 1968. And then a few months later, Obley urged her to repurchase Homestake.

"What makes it so disgraceful is that Hutton failed to exercise supervision over a broker who was obviously trying to make a fast buck for himself," said Jenkins. "It makes you wonder how many other Hutton customers are being hurt by the same kind of practices . . ."

I'm pleased to report that Hutton will make some restitution to Smith, but this determination came about only after the brokerage firm learned of my call to Obley. Hutton chief counsel Loren Schechter said that a former attorney of Smith modified her trust agreement with Hutton to permit her to trade in naked options. And he further insisted that Obley -- who was made a Hutton vice president last December -- is a good broker. Nonetheless, he said, "we intend to make a substantial adjustment . . . because we do try to treat our customers properly."