How to use a Naked Put

Let's see an example of a Naked Put. Your goal is to find a great trade, a strong stock that has just broken out of resistance, as in the below example, MTW stock, has just broke resistance at 78.

However, isn't that speculating? What if the stock does not go up? What if it comes down to 78? Where is our protection? We want to make money if the stock goes up and if it goes against us, downward. Through analyzation we determine or believe the stock will not go bellow support of $78.

We are betting the stock will not go down. You are probably wondering how we can do this. Where is our protection? We could buy a put to protect us if the stock trends down.

Our strategy would be to sell the $75 put for $1.50. If the stock stays above $75 by expiration you can just keep the option. It will expire worthless.

However, if the stock falls to $30 then you may have to buy a $30 stock at $75 or 250% above market value, taking a loss.

Using the Naked Put strategy is the 2nd most dangerous strategy to use. The first is Naked Calls.

The benefit is you will be right more often than not, as you are not asking for the stock to make any drastic movements.

If you are right 90% of the time and on average make $2 every trade and the 10% of the time you are wrong your average loss is $4.

Let's Show You The Money

(.9)*(2)-(.1)*(4)=1.4

Results, on average you would be making $1.4 per trade. You just have to be able to follow those rules.

If you are playing Naked Puts it is wise to sell as little time as possibly on the option so there is less time for the stock to make a big move. You will need a tight stop loss and exit strategy. Monitor this trade daily for added protection.

Remember to always paper trade any new strategy before putting any real money into the stock market.

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