Selling Naked Puts
Selling 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
· NEVER sell a naked put 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
· 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
· 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
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