Hey, I was looking at settings in mod and was wondering where is this "naked outfit" and how do you edit it?

This may go in the category of not very helpful answers, but the naked outfit is what a sim is wearing when they are naked. I mean, I guess that should be a bit obvious. It can include accessories, even socks, a different hair, a snorkel mask and bunny slippers, a suit of armour, etc., whatever gets you going in the morning, like any other outfit and is the one we see our sim in when they for example are in the shower or woohoo among other naked activities.

The naked outfit for a sim can be edited by having them do something that requires it (like take a shower) and then use MC > Stylist on them. Or you could use a helpful mod by CmarNYC that adds the naked outfit category to others in CAS and its subsets like Stylist and Plan Outfit.

It's a common misconception that naked means no CAS parts. A sim still has a naked top, a naked bottom, shoeless feet, hair, etc.or they would be invisible rather than naked and these can each be changed from one CAS part to another.

Where can I find this CmarNYC mod?

This unfortunately gets a little tricky. It is part of her XCAS mod, which is a Core Mod. It is fine to use XCAS together with some other Core Mods (like ErrorTrap), but not AwesomeMod. There will be a conflict on the allowed number of custom sliders allowed if you use XCAS together with MasterController (and if you have any custom sliders, if not then this doesn't apply) but that can be overcome with an XCAS tuning file. I've been using XCAS together with NRaas mods since almost forever.

The other way to approach this is to use CmarNYC's Get Naked mod, which provides a menu command for the player to instantly render a sim naked. Once in that state, if you bring them into Stylist or Plan Outfit, then that is the outfit you will be editing. Back in live mode, you can then use MC to set them into a different outfit if you want for continued gameplay. The Get Naked mod is on MTS' sister adult site, but you have to have an account on it and be logged in to see the content for age verification reasons.
http://sexysims.info/download.php?t=173728