Most people consider selling these options quite a risky business. But this is not true. It is a prudent strategy. For experts it is very good but if you don’t have enough knowledge about this strategy, it can be dangerous. So, you should not be risk-insensitive. Lots of traders spread rumors about it. That’s why people avoid it.
The irony is that financial planners and advisories know about it but they fail to educate others on it. While others who don’t know make no effort to learn about it just because they read and hear negative reviews about it.
What are Naked Put Options?
To trade options naked means that the trader sells options with no position in the underlying instrument. If you are writing naked calls, actually you are selling it about having an underlying stock. If you already own a position, it will be considered covered.
A trader goes for a naked call position when he or she expects that the price of a particular stock will trade below the option strike position at expiration date. The more the amount of premium collected, the maximum is the possible gain. And you can achieve maximum gain when you hold the option through expiration. The option should expire worthless.
Who Can Write Naked puts?
When we come to investors, the following should consider writing it:
- Investors who adopt a buy and hold strategy while trading options.
- Investors who have a bullish opinion of particular stocks.
- Investors who have a bullish opinion of the market.
- Investors who want to make a purchase of a particular stock at a low price.
- Investors who are after additional gains from their holdings.
When we talk about traders, the following should consider writing naked put options.
- Traders who are willing to consider holding a position for a couple of months.
- Traders who are after higher percentage of winning trades.
- Traders who are after initiating a spread position with a bullish leg.
Investment Goals Linked to Naked Call Options
It is a bullish strategy. You can get the following goals while writing naked call options.
- You can make profit. As you have a bullish opinion, you expect the put option to lose value. That can expire without value with the passage of time. If it happens, the cash from selling the put options that is dubbed as premium becomes your profit.
- You can buy a stock at a discount price. In this way you can add new positions to your investment portfolio. It is the best for investors who keep a long-term portfolio. But in order to avail this opportunity your put option should be in money when it expires.
Trading options can be dangerous. That’s why you should consult with a financial advisory’s trading forum such as Steady Options. They have created comprehensive tutorials, infographics, articles for all your need. Their members get quick responses to questions and valuable advice in financial matters.