A huge difference between call options and put options might be the fact call options provide you the ability to purchase a stock at a certain price.

Buying a put option provides you the ability to SELL a stock for a certain price.

Selling put options is commonly seen as an approach to earn a living via the stock market without EVER owning actual stocks.

Selling Naked Puts As An Options Trading Strategy

With naked put option selling, you sell put options on a specific stock at a certain strike price.

By selling the put option you will receive a payment (also called a premium or credit) upfront from the option buyer.

For your put option buyer, this premium is like paying for insurance on a stock he or she already owns.

For the put options seller (that will be us) you are like the insurance company receiving an insurance payment to buy stocks at a certain price.

For the put option seller the amount of money received is also a terrific method to get paid to “possibly” own a stock that you are thinking of buying anyway.

How You Make Money With Naked Put Selling

In a perfect world, any time you sell the put option, (since you also receive your trading profits on the front end) you simply just wait for the option to expire worthless.

Your Maximum profit will be the premium you received from selling the put option.

Your Maximum loss would be the difference between $0 and the strike price of the put option.

So if the market price of the stock drops to $0, you would still have to buy the stock at the put option strike price because you made a contract when you sold the put option.

If the strike prices of the the put option was $30 and the stock dropped to $0, you would be on the hook to buy the stock at $30 although the “market price” is $0. This is why choosing the right stock for your options strategy is extremely important.

The Put Option Expires Worthless If The Stock Price Never Drops Below The Strike Price Of The Put Option You Sold.

What am I saying exactly? What does this mean?

Let’s say stock abc currently is trading at $28 and when you analyze the stock, you reckon it’s going stay flat or climb higher.

You can choose to sell the put option with 30 days (to expiration) and at the strike price of $25.

By creating this trade, you can be in a position to profit should the stock rise, or stay flat. You will still profit even if the stock drops to $25! Are you getting excited yet?

Ok, so this is sounding exactly like the call option selling strategy, why would you do naked put option selling instead?

Here a few reasons to consider Naked Put Option Selling over the Covered Call options trading strategy.

I don’t pay any margin interest with put option selling strategies

To raise my buying power, I employ margin for my brokerage account.

Using a margin trading account means that I can have at minimum (read more about this later) double my buying power.

How Does Using Margin Help Your Options Trading Strategies?

With a margin account, if I have $10,000 in my personal brokerage account, my buying power might be $20,000……or more depending on the volatility of the underlying stock!

Margin is money you borrow from your own broker so you do need to pay interest on it. The interest is negligible when compared to the amount of money you stand to make with the extra buying power.

If you’ve bought stocks on margin then you can expect to get charged interest each and every month. So your timeline should be short term.

An important note about margin is that (although your buying power is increased substantially) you only pay interest on stocks you bought or “own” on margin.

With the naked put option selling strategy, you don’t actually own the stock, so although your margin buying power is taken into account for the number of put options you can sell, you won’t get charged interest on margin.

You Get More Money For Selling Put Options Than You Would Selling Call Options

More money with this put options trading strategy means you could build wealth faster.

If you look into the options chain of a stock for a given strike price, you will see that the put option will normally be more expensive than the call option at the same strike price.

Selling Put Options is Like Free Money

With put options selling you are receiving a premium for stocks that you don’t own.

You are basically getting paid to “possibly” own a stock.

Most options traders today (me included) who use the Naked Put Selling tactic never intend to own the underlying stock. Most options traders only desire to collect the dollars they get by selling the put option.

In case you DO want to own some stock, this is a fantastic way to generate money to acquire a stock that suits you and it will also lower your overall cost of ownership of the stock.

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About the Author

Dale

Investor, mentor, business owner for over 12 years

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