SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

The Naked Put, A Low-Risk Strategy


The naked put is a low-risk strategy, despite commonly held beliefs to the contrary - guest post by Michael C. Thomsett. The market risk of the naked (uncovered) put is identical to the market risk of a covered call. However, the two strategies also have important differences:

 

Uncovered put

Covered call

Dividends are not earned.

Dividends are earned as long as shares are held.

The uncovered put can be exercised, but this can be avoided easily, by closing the position, rolling it forward, or waiting for worthless expiration.

Covered calls can be exercised, and 100 shares of stock must be delivered at the strike. Exercise can be avoided by closing or rolling the in-the-money covered call.

Time is an advantage. The closer to expiration, the more rapidly time value declines. The uncovered put can be closed at a profit or allowed to expire worthless.

Time is an advantage. The closer to expiration, the more rapidly time value declines. The covered call can be closed at a profit or allowed to expire worthless.

Moneyness determines whether to close or roll the uncovered put. An out-of-the-money put will expire worthless; an in-the-money put is at risk of exercise.

Moneyness determines whether to close or roll the covered call. An out-of-the-money call will expire worthless and can be replaced; an in-the-money call is at risk of exercise, in which case shares will be given up at the strike.

Collateral is required equal to 20 percent of the strike value, minus premium received for selling the put. This is advantageous leverage when compared to the covered call.

No collateral is required for a covered call. However, to buy 100 shares of the underlying, 50 percent must be paid, and the remaining 50 percent is bought on margin.

 

The timing for opening a naked put is essential to reduce exposure to unwanted exercise. The best position for a naked put is when the underlying price moves through support and you expect price to retrace back into range.

For example, the chart for Amazon.com (AMZN) shows examples of when this occurred.

 

 image.png

 

The highlighted price moves both fell below the trendline shown on the chart. Given the long-term bullish trend for AMZN, it was reasonable to expect the price to reverse to the upside. This is what occurred in both instances.

A second consideration is creation of a buffer zone between current price per share and the selected strike for the short put. Because AMZN is a high-priced stock, the opportunities for buffer zones are significant. For example, after the huge decline in February from nearly $1,500 per share down to 21,350 by February 6, anticipating a rebound would be well-timed. During the trading day of February 8 and about 30 minutes into the session,AMZN was trading at $1,416.36 per share. A couple of naked put trades to consider at that  moment:

  1. The 1,410 put expiring in one day (Feb. 9) was at a bid of 10.05. This is incredibly rich considering the one-day expiration. The strike was six points below current price. That, plus the net $1,000 for selling the put, sets up a buffer zone of 16 points.
  2. The 1,362.50 put expiring in eight days (Feb. 16) showed a bid price of 13.05. This is 54 points below current price. Adding the 13 points received for selling the put, this creates a 67-point buffer zone over an exposure period of eight days. Time decay will be rapid. Typically, options expiring in one week lose 34% of their remaining time value between Friday and Monday. In this example, that spans February 9 to 12 – three calendar days but only one trading day.

The timing and buffer zone are the two keys to a successful short put strategy. Whether you select extremely short-term (one day) or a little longer (eight days), the profit potential is attractive, in large part due to the recent volatility in the market and in AMZN, which fell 150 points in two days. The extreme move in price makes the point that timing is everything with this strategy. The likely bargain hunting at such a low price makes an upward move likely. By February 8, price had always moved from the low of $1,350 to $1,416, recovery of 66 points out of the 150 points previously lost.

As with all options strategies, especially those involving a short position, this one has to be monitored every day. Because things change rapidly in volatile markets, you need to get out when you can to maximize profits or, in worst case situations, to  mitigate losses. The need for a buffer zone and attractive premium levels makes the naked put a potentially profitable strategy, even for the conservative trader.


Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Publishing as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Leveraged Anchor: A Two Month Review

    Steady Options has now been tracking the Leveraged Anchor from the unlevered version for just over two months.  The results so far have substantially beat expectations, though there is a possibility for improvements discussed at the end of this piece. 

    By cwelsh,

    • 0 comments
    • 104 views
  • Options and Diversification Myths

    Options traders often overlook the nature and role of diversification. In picking one strategy over another, and in deciding which companies to use for options trading, diversification should be one of the attributes worth study. Why do options traders need to think about diversification?

    By Michael C. Thomsett,

    • 0 comments
    • 327 views
  • SteadyOptions Managed Accounts

    One of the most common questions Steady Options receives relates to managed accounts. Lorintine Capital is offering managed accounts for both Anchor Trades and Steady Momentum. This post will detail the current Steady Options managed account offerings and how they work.

    By cwelsh,

    • 0 comments
    • 241 views
  • IVolatility Tools: Probability Calculator

    The S&P 500 Index advance continues from its December 26th low at 2346.58, but it’s yet to exceed the December 3rd high at 2800.18.  Will it continue?  Will it crash? Will the bulls get their way? Find out in our short market review, followed by strategy suggestions, created using our Probability Calculator, currently available to all Steady Options subscribers.

    By Levi Ioffe,

    • 0 comments
    • 514 views
  • SteadyOptions Strategies Analysis

    SteadyOptions trades a variety of option strategies – straddles, hedged straddles, calendars, butterflies and iron condors, volatility trades, etc..  Frequently these trades are designed to work together and complement each other, so for the last several years Steady Options has only analyzed total performance.

    By cwelsh,

    • 0 comments
    • 408 views
  • Equity Index Put Writing For The Long Run

    One of my all-time favorite investing books is Jeremy Siegel's Stocks For The Long Run, which is currently in it's 5th edition. It's a true classic that I refer back to often.  Professor Siegel lays out the compelling case for equities over extended time horizons such as 20 or 30 years.

    By Jesse,

    • 1 comment
    • 535 views
  • Why You SHOULD Learn Options Trading

    Few days ago I came across a Seeking Alpha article called Why I Never Trade Stock Options. This is probably one of the most misleading articles I have read in years. I would like to put things in perspective and provide a rebuttal to some of the claims in the article.

    By Kim,

    • 0 comments
    • 505 views
  • Are Uncovered Calls Always High-Risk?

    The “common knowledge” about uncovered calls is that they are always high-risk. Conservative traders should avoid them. But is this always true? Risk by  most definitions is associated with specific strategies. So covered calls are low-risk and uncovered calls are high-risk. But this assumption is not always a fair one.

    By Michael C. Thomsett,

    • 0 comments
    • 503 views
  • IVolatility Tools: Advanced Options

    Perhaps the toughest part of trading options is figuring out what to do. For this we have advisors, seminars, newsletters and more. Yet, one tool that all investors need, but few utilize adequately, is data. This concept is parroted across the industry, but how does the average investor move from the desire to utilize data to the actual practice?

    By Levi Ioffe,

    • 2 comments
    • 828 views
  • A Global Equity Put Write Portfolio

    Many that sell equity market put options focus on the S&P 500 (SPX, XSP, SPY). Some will add small caps by selling puts on the Russell 2000 (RUT, IWM). An investor could also make their put selling strategy globally diversified by adding MSCI EAFE (EFA) and Emerging Markets (EEM).

    By Jesse,

    • 0 comments
    • 771 views

  Report Article

We want to hear from you!


There is a general perception that naked options are risky in general. But the problem is not the strategy. The problem is how you use it. Sure, if you sell naked options to get income and sell more than you can swallow, it can be a problem. But selling number of contracts only equal to number of shares you are willing to own is an excellent way to buy stocks at discount.

Share this comment


Link to comment
Share on other sites

Interesting you raised the subject. Based on the original comment on this I did sell a naked put on Amazon last week and collected $1000 in profit in 4 days. If you can get in at a good support level it can work out quite well.

Share this comment


Link to comment
Share on other sites

Agree. You get both worlds with risk reversal: buying the stock at discount, and getting the upside potential if the stock starts to rise.

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs