When someone asks me what do you do for a living I tell them that I trade the stock market.  That usually causes an inquisitive look on their face and bring them to their next question of what do you trade? I told him I love going naked in the market. That usually causes a strange look on their face to which I respond“my favorite strategy to trade is selling naked puts”. The natural response is normally “what is a naked put; is it even legal”? I say “of course it’s legal” let me explain this amazing strategy.

Most investors work with a stock broker and the favorite strategy of a broker isto buy and hold. Much of the buy and hold is in individual stocks. This is a wonderful long term strategy for any investor but the scary part is that a naked put is an option strategy that can be used very successfully for acquiring stock and most brokers will never offer up to their clients this strategy because they don’t understand how to use it effectively. Although the brokers explanation is that naked puts is a risky strategy but I will prove to you that this is not the case.

Option strategies have their own secret decoder ring language that most outsiders are unfamiliar with. Let’s break the strategy down into bite size pieces so it is more palatable for the average investor to understand.

Trading Naked Puts For A Living – Is a put option whose writer does not have an investment in the stock on which he or she has written (or sold) the put. This is sometimes referred to as an “uncovered put.”

REASON FOR SELLING PUTS

There are two primary reasons for selling naked puts. The first is my favorite reason; it is to receive the premium from the option. The second is to purchase a stock at a lower price than it is trading for now.

WHAT IS BEING SOLD

It’s sometimes difficult for investors to wrap their heads around what is being sold since they never bought anything in the first place. Think of a car insurance policy, an agent sells a car owner a policy to protect against a car accident.

Does the agent own the policy? No, the insurance company does. Is it theirs to sell? No, they are authorized to sell it.

Do they have to pay the car owner upon an accident? Once again the answer is no, the insurance company will pay the claim. So what did they sell you? They sold you something they didn’t own and took on an obligation to cover your car’s damage in the case of an accident.

A NAKED PUT EXAMPLE

  • “XYZ” stock is selling at $72.51 per share
  • An investor sells one contract of the $70p (out of the money put for a maximum of 6 weeks) on “XYZ”
  • The 70p is trading for $0.80 x $1.00. The seller would receive $0.80 per share or $80.00 per contract.
  • If the stock closes above $70 on the expiration date the put expires worthless and the investor keeps the $0.80 per share.
  • If the stock closes below $70 per share on the expiration date they would need to purchase the stock for the same strike price that was sold, in this case, $70.

Selling naked puts is a great strategy for acquiring stock for a lower price than it is currently trading for. Or it can be used as a strategy for collecting premium. In Covered Call Explorer, we offer three different strategies, naked puts being one of them. Start off by taking the candidates from the list each week and practice trading them to build up your confidence with the strategy.

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