What Is A Naked Put Option?



http://www.OptionTradingAdvantage.com - How To Trade Naked Put Options. Learn what a naked put option is and how you can use them to buy stocks at a discount. Naked Puts Options Explained by Jack and Jill Jill: Hey Jack have you heard of naked puts? Jack: Naked? I'm not naked. I'm wearing a tie. Jill: No silly. Naked puts are a way to buy stocks at a discount. Jack: Really? Stocks on Sale? Tell me more. Jill: All you do is choose a stock you want to buy and sell an out of the money put. Jack: Doesn't it take money to sell a put? Jill: Actually you get paid a credit to sell the put. Jill: Then at expiration, if the stock is trading above the strike price...the option expires (goes away) and you keep the entire credit you were paid. Jack: Whoa. That's like magic or something. Jack: What happens if the stock is below the strike price at expiration? Jill: You get to buy the stock at the strike price and keep the credit you got. Jack: I don't get it. How about an example? Jill: Fine. But pay attention. You want to buy 100 shares of XYZ which is trading at $200. Instead of buying the stock, you sell a 170 strike Put option within 30 days to expiration. For this you get a credit of .50 per share or $50 total. On expiration day, if XYZ is trading at $170 or higher, your option expires worthless and you keep the $50. If it is trading below $170 you have to buy the stock at $170. But since you were going to buy the stock at $200 anyway, you saved $30 per share and got paid $50 for waiting. Jack: That's awesome. Wait. What's the catch? Jill: The risk is if the stock drops a lot below your strike. Jack: Yeah, like to zero. Jill: That's why you only do this on companies you want to own. Jack: That's pretty cool, Jill. Say, how'd you get so smart? Jill: My secret? It's... OptionsTradingAdvantage.com Options Trading For Everyone Options trading is risky. Educate yourself before you do anything and never risk money you cannot afford to lose. http://www.OptionsTradingAdvantage.com

Comments

  1. Just to clarify, in your example if your stock is trading at $170 or higher you would keep the $170 that you made from the sale of the stock plus the $50. Is this correct?
  2. but the assumption on buying the xyz stock was 100 shares...if the price falls below 170..you have you buy the contract at 100 shares...by 170 is 17000 dollars...the risk wasnt mentioned in a sense of a accumulated numbers example.
  3. cool way to explain it, thanks  
  4. I didn't know anything about naked puts! This helped so much!


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