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Return to Option Strategies

This is a bullish strategy.

When we write a Naked Put Option, it means we decide to write an option without owning the underlying stock. However, we are still obligated to purchase the stock from the buyer of the Put Option if they choose to exercise it, however the stock has to be at or below the strike price.

Because of this, the stock broker will hold the necessary cash from our account in trust to ensure that we can buy the stock. The buyer of the Put Option is expecting the price of the stock to go down and hopes to obligate us to buy the stock off them at the higher strike price.

This is a high reward and high risk strategy.

The are two reasons for this strategy:

• First is to receive an option premium with out buying the stock.
• Second is to be able to own the Stock XYZ at a lower price.

We write Naked Puts when we expect a stock to be bullish.

Example: Stock XYZ is trading at 30.00 and based on our research, we believe the stock is on its way to 40.00. We would Write a Naked Put of 25.00.00 strike price and receive 2.50 option premium. As expected, stock XYZ increases in value to $40.00 by expiration date and the option expires worthless, and we keep the option premium, 2.50 times 100 per contract, times the number of contracts we wrote.

As the writer of the option, there is a risk for us if the stock should decrease in value. (Remember, we have received a non-refundable option premium of $2.50 per stock). If the stock decreases to $24 and the buyer of the put exercises the option forcing us to buy the stock off him for $25.00 we are still ahead. We turn around and sell the stock and lose $1.00, but this is offset by the $2.50 option premium, leaving us $1.50 ahead. We could also choose to hold the stock, if we still expect it to go up.

However, if there has been a significant drop in price, we may find ourselves in a losing position, even after we factor in the option premium. There are several things we can do to salvage our position:

1. Buy to close out the position we wrote; we close out the position by buying back the same Put Option with the same Strike Price and same expiration date.

We will may have to pay more money for that position then we receive.

2. If we still feel bullish on Stock XYZ, we may roll over the position and write another Put Option on the stock and repeat the process. We receive the premium which is more then our earlier losses.

Example: In the original play we wrote (sold) the $25.00 Put for $2.50, when stock XYZ dropped in value we covered by buying back the same position lets say for $3.50, we are now losing $1.00, to roll over simply means to write the next month out the $25.00 strike price for $4.50 we are receiving additional money because of the extra time period.

Originally we received $2.50 the play did not work we bought it back for $3.50 we are still bullish on the stock so we wrote the play over again and received $4.50 - $1.00 for the previous loss and we have an extra $3.00 in our account per option.

Points to remember when writing Naked Puts:

• rite Naked Puts only on bullish stocks that are in a up trend.
• rite Naked Puts on stocks that we would not mind owning.
• rite Naked Puts on stocks Out of the Money. There is a chance In the money options may be exercised even if the buyer of the option is only trying to recoup some of his loses.