Naked Put Writing
Writing uncovered puts is an advanced options strategy. It involves selling put options without owning any shares of the underlying stock.
Like with any option selling… you collect a premium, putting money in your pocket.
However, it’s important to remember when selling any options without their underlying stock positions, your losses are not limited.
However, used the proper way, naked put writing can be very lucrative.
There are basically three ways you can use naked puts for.
The first… to acquire stock. By selling naked puts at a strike price you are willing to own the stock is a good way to get paid while you wait. You also collect the premium, so if the stock never reaches your strike price, you still make money.
As a matter of fact, some well known stock investors like Warren Buffet, use naked puts this way in order to buy a stake in Baker Hughs (BHI).
Just remember when naked put writing, you’ll need a margin account. Please check with your broker for their rules.
There’s another way to use naked puts…
It’s called “cash secured” put writing. The big difference in this case, margin is not required. This works the same way as above. Except for the fact, if your puts get assigned to you, the cash amount of cash you need to buy the assigned shares is already in your account.
Lastly… you can use naked put writing for pure speculation.
Here, you’d pick a put option strike price where you think the stock will not trade below. You then collect your premium, put it in your pocket. And hope at expiration, the price of your stock is above your puts strike price.
If so, the premium is all yours.
Category: Options Trading Strategies
