Options strategy: naked puts

A naked put is a strategy where the writer sells the put without assuming a short position on the stock. The advantage of using this strategy is once the underlying stock did not reach the strike price, the naked put writer gets to keep the premium received without risking significant capital to assume a short position on a particular stock. If the put was exercised by the put buyer, the naked put writer will be forced to buy the stock at the strike price.

To look at the advantage of using this strategy, lets say that an investor is looking to buy stocks of ABCD and its current market price is $100 a share, he is thinking of placing a limit order instead at $95 to take advantage of a possible dip. If the investor placed a limit order, he would have to wait until the price hit $90. However, if the investor sold naked puts on ABCD stock at $95 for $2.50 per contract, the investor would receive a $250 premium while waiting for the stock to drop to $95. Days passed and before expiration, the market price of ABCD fell to $93 and it was exercised by the put buyer, the writer would still have to buy the stock at the strike price of $95 even if the stock is trading at the current market price of $93. It is still better than buying the stock at market price when it was $100 or waiting several days for it to go down to $95.

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