Naked Put Write

How Does Naked Put Write Work in Options Trading?

Select Your Language... Translate to Chinese Translate to Spanish Translate to French Translate to German Translate to Italian Translate to Portuguese

Learn How To Read This Chart

Purpose Of Naked Put Write

1. To Profit From Rising Stocks
2. To Put Time Decay In Your Favor
3. To Recieve Upfront Payment For The Position

Expectation Of Naked Put Write

Stagnant and Up

Type Of Spread

Naked Option

How To Use Naked Put Write?

Sell to open At The Money (ATM) Put Options.
(Find out how Writing Out Of The Money Put Options can fulfill the best of all worlds)

Sell ATM Put

Profit Potential of Naked Put Write :

The Naked Put Write achieves it's maximum profit when the underlying stock is above the strike price of the put options during expiration.

Profit Calculation of Naked Put Write :

There are 2 ways to calculate profit for Naked Put Write : Before Expiration and After Expiration.

Before Expiration
Before expiration, the Naked Put Write profits from a fraction of the move in the underlying stock based on its delta value and a fraction of the put option's premium value due to time decay based on it's theta value.

After Expiration
Upon expiration, there can be 2 possible scenarios for the Naked Put Write :

1. The underlying stock rises higher than the strike price
When the underlying stock is trading higher than the strike price of the put options that you sold upon expiration, those put options expires out of the money (OTM) and the entire price of the put options that you sold becomes your profit.

2. The underlying stock is trading lower than the strike price
Profit / Loss = Net Credit - (Strike Price - Stock Price)

Maximum Loss of Naked Put Write:

Maximum loss = (Strike Price - Premium Value) x Number of Contracts.

Risk / Reward of Naked Put Write:

Upside Maximum Profit: Limited
Limited to net credit recieved.

Maximum Loss: Limited
Limited to 100% of the strike price when stock falls to zero

Break Even Point of Naked Put Write:

Breakeven = Initial stock price - premium value of put options sold.

Advantages Of Naked Put Write:

As the strategy results in a net credit, risk is reduced.

It is a simple option strategy which requires no precise calculation to execute, unlike other more complex option strategies.

As it involves trading only one kind of option, the commissions involved would be much lower than the rest of the other more complex option strategies

It allows you to profit even if the underlying stock stays completely stagnant.

It is a versatile option strategy which can be transformed into other option strategies in order to accomodate changing market outlooks prior to expiration.

Unlike in a Long Call Option, a Naked Put Write offers you a degree of protection from loss if the underlying stock falls slightly instead of rises.

Disadvantages Of Naked Put Write:

Potential profit is limited, so if the stock goes into a huge rally, one could miss out on the profit opportunity.

One could lose a lot of money if the underlying stock falls drastically.

As Naked Put Write is a credit strategy that involves margin, beginners are rarely allowed to execute it with most online brokers.

As margin requirements can be quite large, one may not be able to put on as many positions as one may simply by buying call options.

Don't Know If This Is The Right Option Strategy For You? Try our Option Strategy Selector!

Javascript Tree Menu