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Selling naked puts, either cash secured or on margin, is a means for investors to:
- Generate monthly or weekly income on bullish stocks
- Potentially get into stocks at a discounted price
- You now own shares that are trading well below the break even
- You may have to pay a much larger premium to Buy to Close the now deep ITM put and attempt to manage the position
- You may be assigned early, [buy cheap mestinon] forcing stock purchase before you have the chance to manage (roll) the position
- % to Break Even – this shows the % value the stock can fall before you start losing money on the position. This takes into account the strike price of the put option in relation to the current stock price and the premium received: [Current Stock Price – (Put Strike Price – Premium)] / Current Stock Price
- % Naked Yield – the % return or interest you receive for selling the put option. The Naked Yield is based on the total margin requirement you may have to have on hold in your account to enter the trade. The % Naked Yield is calculated as: Option Time Value Premium / Put Strike Price
- % In/Out of the Money – in general naked put sellers will look to sell a put below the current stock price. The range Out of the Money (OTM) gives the investor a sense of the 'safety cushion' they have when entering a naked put. The % In / Out of the Money shows how far away the put strike price is from the current stock, as a percentage against the current stock price. The % to Break Even is a better calculation as it takes into account the premium received, however many naked put sellers will look for puts that are at least 3% Out of the Money or so, depending on their tolerance. % Out of the Money = (Stock Price – put strike price) / Stock Price
- % Probability – the calculated probability or odds that the stock price will be above the put strike price at expiration
- As the strike price increases (puts are getting deeper In-the-Money)
- Option Premium increases (though just in intrinsic value)
- % to Break Even decreases
- % Naked Yield decreases
- % Probability above decreases
- As the strike price decreases (puts are getting deeper Out-of-the-Money)
- Option Premium decreases
- % to Break Even increases
- % Naked Yield decreases
- % Probability above increases
|Simplified Apple Inc. (AAPL) @ $97. 75 put chain with 24 days remaining to expiration:|
|Put Strike Price ($)||Option Premium ($)||% to Break Even||% Naked Yield||% Out-of-the-Money||% Probability Above|
|95||0. 92||3. 7||1||2. 8||71. 4|
|97. 5||1. 81||2. 1||1. 9||0. 2||51. 8|
|100||3. 21||0. 9||0. 9||-2. 3 (ITM)||32. 1|
- Conservative – 2. 5% or more Out-of-the-Money. These naked puts will offer a higher % to Break Even, a higher % Probability Above but a lower premium and % Naked Yield. An investor will not receive any further credit or premium if the stock moves up higher while the investor is in the trade. This strike selection is used by naked put investors who want the put to expire worthless (fully profitable) on a consistent basis, or have a really low price target for owning the underlying security. However buy cheap mestinon, if you sell a put that is too deep OTM with a high % Probability Above, the option premium and % Naked Yield will be very small and likely will not match your trading plan.
- Moderate – Between 2% Out-of-the-Money and up to 1% In-the-Money. This is the At-The-Money put seller who wants the highest Naked Yield for their expiration time frame, a relatively good % to Break Even and would not mind owning the stock after the first write cycle. The trade off is that the investor realizes there is roughly a 50-50 chance that the ATM put will expire worthless or that the put will be ITM at expiration – meaning the investor will either allow the stock to be put to them or manage the position.
- Aggressive – Put strike is more than 1% In-the-Money. This offers the highest overall premium but a lower % Naked Yield based on the time premium. This offers the lowest % Probability Above, which means a higher probability that the put will be assigned. Investors that sell ITM puts are likely hoping to get put the stock at expiration, for a slightly lower cost basis then if they had purchased the shares out right. This is speculative as the investor will not realize the full benefit of the higher ITM premium unless the stock moves up a fair amount prior to expiration. Using this method to acquire stock is risky. If the stock price jumps up and the put goes OTM, the stock will not be assigned and a higher price must be paid to enter the stock position. A saving grace is that you did make a little extra on the higher option premium.