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You Are Here: Home > Stockmarket & Trading > Options > Option Strategies > Naked Put
The Different Option Strategies
Naked Put
Summary:
A Naked Put is a bullish to neutral trade. The seller will collect the option premium should the market either stay flat or go higher.

For aggressive traders who are bullish about the prospects for a stock. This trade is best put on when volatility is high and you expect it to contract. The trade should never be attempted by beginners unless they fully understand the risks involved.

Naked Put
Risk: Limited because the stock cannot trade below zero, but the risk can still be massive because of the inherent leverage involved.
Reward: Limited
The Trade: An at the money or out of the money Put is sold short.

ABC Stock trading at £5.00

Sell or 'write' 1 Sep £4.50 put (see pay-off diagram below)

Options - Naked Put

When to use: You are neutral to mildly bullish on the stock. Sell lower strike options if you are only somewhat convinced; sell higher strike options if you are very confident the stock will stagnate or rise. If you doubt stock/index will stagnate, sell at-the-money options for maximum profit.
Volatility expectation: Bearish, increases in volatility hurt the position.
Profit: Limited to the premium received from sale. At expiration, break-even point is strike price A less premium received. Maximum profit realised if stock settles at or above A.
Loss: Increases as stock/index falls. Because the risk is open-ended, this position must be watched closely.
Breakeven: Reached when the underlying falls below the strike price A by the same amount as the premium received from selling the put.
Time decay: This position is a growing asset. As time passes, the time value will shrink. Maximum rate of increasing profits occurs if the option is at-the-money.

Trading ideas and tactics:

  • Watch and fully understand the risk when selling puts naked

  • Some short sellers of options will always cover and take the loss should the option premium double. If an option is sold at 50 points and it trades to 100, cover the trade immediately. This is good risk management advice

  • Good traders know what they're going to do before it happens - Again have a plan - DON'T HESITATE

  • The best time to sell naked puts is when volatility is very high and the markets are very extended on the downside - Fortune often favours the brave (but not stupid) in these types of situations

  • Consider selling a position in pieces as your bullish view is confirmed - Keep some powder dry

  • Consider covering the short option to take your profit when you collect 90% of premium. If you sold it at 100, take profits at 10

  • Great way to accumulate cash stocks especially after a large fall when volatility is high

  • Don't get drunk on selling puts in a rising market. This means that every month you'll be making good money and you may start to think that it's your 'skill' as a 'trader' that's making the money rather than market circumstances, ie rising prices
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