Naked put selling

Naked put selling is a strategy for making an income in the stock market. This strategy involves selling an out of the money put on a strong stock and hoping it expires worthless.

Let’s look at an example. The stock MTW has been trending up and has just broken out of resistance of $78. That is a positive sign and indicates that the stock will most likely continue to head higher in the short term.

It is also a fundamentally strong stock that we would not mind getting into for a longer term time frame. So we can decide to sell the $75 put for $1.50.

Our max profit from this trade would be $1.50 and we would realize it as long as the stock stays above $78 by expiration. If the stock falls we would have to buy it at $75.

So our max loss could potentially get pretty high if the trade turns against us. That is why naked put selling works best on stocks that you would not mind holding for the long term, you might get the chance.

I used to trade naked puts freely on the open market. It was a way for me to make a few hundred dollars a month. And at the time it seemed like I just could not lose money.

Then 1 day a strong up trending stock I was in came under federal investigation. The stock went from $90 to $20 in 1 day. Luckily I had a bull put spread and not a naked put on it, so my loss was limited. But that was an eye opener.

From that point on I decided I would not sell naked puts unless they were on stocks I would not mind owning for the long term.

In other words any time I sell a naked put now days the stock must have excellent fundamentals, or be a strong ETF. That is just my experience anyways.