Selling or Writing Naked Put Options
How Do You Write Naked Puts?
How Do You Make Money Writing Naked Puts?
What does "Selling Naked Puts" mean:
Put options give the holder the right, but not the obligation, to sell a stock at a certain price by a certain date. Now think about the other side of that transaction... In order for someone to buy the put option, someone has to have sold the right to that person. The person buying the put option hopes the price of the underlying stock will go down, and the person who sold that person that right is hoping the price will stay the same or go up. If the owner of the put option is going to exercise it and sell the stock at the strike price, they have to be selling it to someone, right? That person that they are selling it to is, of course, buying the stock from them at the strike price. In the transaction where a buyer buys a put the seller of the put is said to have "sold a put" or "written a put option." The terms "writing" and "selling" are interchangeable.
The person that bought the put option hopes the stock will go down and has an expected payoff that looks like this:
The person that sold or wrote that put option, however, can have two different expected outcomes depending on whether or not he is short the stock. If the seller isn't short the underlying stock then he is said to be selling naked puts or writing naked puts. But if the seller is short the underlying stock, then he is said to be selling covered puts or writing covered puts.
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Here are the top 10 option concepts you should understand before making your first real trade: