Selling Naked Puts

Selling naked puts is a strategy that can be used to get into a stock and to bring in monthly income from the stock market. To do this you use put option.

This strategy is simple. You simply sell a put on a stock that you think is strong. If the stock stays above the strike price of the put by expiration you pocket the premium.

If the stock falls below the strike price you will either have to buy the put back or let it get exercised and be forced to buy the stock at the strike price.

Max profit

The most you can possible make from selling naked puts is the premium you receive. If you sell a put for $1 the most you can make is $1. If you sell 1 contract, which is 100 shares you would make $100.

Max Loss

The most you can possibly lose is the difference between the strike price of the put you sold and 0. So say we sold the $30 put for $1. The most we could make is $1, but the most we could lose is $30. If the stock goes to $0 we would lose $30 because we would be forced to buy this $0 stock at $30.

That is why most brokers will require you to be very experienced before you get into naked options.

Why I like Naked Puts

I like selling naked puts, especially when the markets are undervalued and volatile. Now I know what you are thinking, why would you like a strategy that can give you a $1 reward for a $30 risk?

Well, this is the key to using naked puts, you must only sell them on stocks you would not mind holding for the long term. What if the stock XYZ is a solid business that is undervalued and could potentially go up in the long term?

Selling naked puts on strong long term companies is a way to make some income up front and as long as you like the company you have nothing to worry about. The worst thing that could happen is you would be forced to buy the stock.

A word of caution however, it is easy to get carried away and sell too much premium. Anything you sell you should be able to handle getting handed the stock. So if you have $10,000 in your account you shouldn’t sell puts on $40,000 worth of stock, because if the worst case scenario happens and you end up having to buy $40,000 worth of stock you are going to be in trouble.