Covered Call Writing

 
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Selling Naked Puts  

 

Selling Naked PutsSelling naked puts if done correctly can add sizable premium to your portfolio. Done incorrectly, it can be a disaster! 

 

A naked put is a bullish strategy; you believe a certain stock is either going to go up in value before the next expiration or at least stay flat.

 

Say the stock is at $25.00 with 4 weeks left to expiration. You sell the front month $20 put and collect $1.50 in premium. If the stock is at or above the $25 strike price, you keep the premium. In reality, due to the time erosion, the stock can land below the strike price and the option you sold will be less than $1.50. During the final week of expiration, time erosion can be 20% per day, keep you safe and in the money. 

 

There are some things to consider when you sell naked puts

 

·     NEVER sell puts on a stock that you would not want to own. Some of the premiums can be very enticing and that is dangerous. Many professionals use naked puts to buy their favorite stocks at lower prices. 

 

·     Make sure the put strike you sell is at least one strike out of the money and below a decent support point. This is key. You want to know where historically buyers have entered if a price decline occurs. If you want less risk, sell a put spread. That means if the stock is $25 and you see a $20 put for income, you then buy a $15 put and pocket the difference. Your total risk if you do not want to stock put to you is the difference in the strike, less the premium collected.

 

·     There are extra margin requirements; you will need to call your broker as each broker has a different requirement. In general, the margin is equal to about 25% of the stock price, plus the premium and minus the amount out-of -the money. For example, say a stock is trading at $29.00 and you sell the current month $25 put for $.65 in premium. The calculation would be $7.25 (25% of the stock price), plus the $.65 for $7.90, then minus $5.00 (the amount out of the money) for a margin requirement of $2.90 per share. If you sold 10 contracts, you need about $2900 in margin to collect the $650. That’s a 22% return. Not bad! 

 

On more expensive stocks and very volatile stocks the rules may change. Stocks like Google and Apple have very high margin requirements due to their volatility. 

 
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