Options premium selling example question.

[jacobogrady]

Selling options example. Lets say I am selling FB with a current stock price of $145 and do an OTM naked put option at $120/0.03 last price. I sell 800 contracts which would be a total cost of $2,400 with an expiration date of 11/16/18. If FB stays above $120 by expiration in 5 days I would get to keep 100% of the premium as profit? I am confused by this since it seems like I am missing something. Thanks.

[Kim]

That is correct. But this assumes you can get 0.03 plus it ignores commissions.

[jacobogrady]

Yes I was ignoring commission and assuming I get 0.03X800 as long as FB stays above $120 I make $2,400 is that correct? Sorry I am still learning this all.

[Kim]

That is correct. But while it might seem like a free money, this is not the case. You also need to consider the margin required to sell 800 naked puts.

[Kim]

P.S. I highly doubt you will get 0.03 for 120 puts. And your margin for selling 800 puts would be almost one million dollar. So even if you could get 0.03 and keep all the premium, the return on margin would be 0.24%, before commissions. Hardly worth the risk.

[Azov]

Plus keep in mind that it’s not at all uncommon for FB to move $10 or $20 in a day - often to the downside. Naked puts at $120 (especially at the size you’re talking about) could quickly turn into a disaster.