Naked Puts

[Garfield1971]

Hi all,
I've been writing covered calls on and off for 10 years,so although I'm not a complete novice,I'm by no means an expert.
I'd like to ask so of you option experts about writing cash secured puts for income.
Say if I wrote a put on XYZ currently trading at $50 and received $1 premium,I'd then have an order in to buy the option back at $2 if the stock were to drop,giving me a 1:1 risk/reward ratio,or would it be better to have an order in to buy the option back at market if the stock price were to hit say $45.
I just want to protect myself from a stock gapping down and I'm left holding a stock that's worth $20 that I paid $45 for and I can't even write covered calls on it as its so deep in the money.I know I could trade a spread where my maximum loss is know from the start,but I figure by buying it back if there's a drop in price,and possibly rolling down,I'm only paying for that protection when I need it,ie if the price drops.
Also thinking at using an index etf as a dramatic drop in price is more unlikely than on a single stock.
Anyway I've got thick skin,tell me what you think,thanks in advance

 

[wino59]

Hi all,
I've been writing covered calls on and off for 10 years,so although I'm not a complete novice,I'm by no means an expert.
I'd like to ask so of you option experts about writing cash secured puts for income.
Say if I wrote a put on XYZ currently trading at $50 and received $1 premium,I'd then have an order in to buy the option back at $2 if the stock were to drop,giving me a 1:1 risk/reward ratio,or would it be better to have an order in to buy the option back at market if the stock price were to hit say $45.
I just want to protect myself from a stock gapping down and I'm left holding a stock that's worth $20 that I paid $45 for and I can't even write covered calls on it as its so deep in the money.I know I could trade a spread where my maximum loss is know from the start,but I figure by buying it back if there's a drop in price,and possibly rolling down,I'm only paying for that protection when I need it,ie if the price drops.
Also thinking at using an index etf as a dramatic drop in price is more unlikely than on a single stock.
Anyway I've got thick skin,tell me what you think,thanks in advance

I am not sure why you want to write a put or call in the first place. The only time I write them is when I have a complicated spread position on and I am using it to collect theta.

Generally writing options is a bad idea, because you have unlimited downside potential and capped upside potential....Not a great scenario. The most you can make is the premium.

I would you suggest you buy a put or call, also volatility can dramatically effect option pricing, so it is not just market moves.

 

[Garfield1971]

Thanks for your reply,everything you say makes sense,especially the risk/reward on naked puts,which is why I'm so hesitent with the strategy

 

[grega711]

More on naked puts

Hi all,
I've been writing covered calls on and off for 10 years,so although I'm not a complete novice,I'm by no means an expert.
I'd like to ask so of you option experts about writing cash secured puts for income.
Say if I wrote a put on XYZ currently trading at $50 and received $1 premium,I'd then have an order in to buy the option back at $2 if the stock were to drop,giving me a 1:1 risk/reward ratio,or would it be better to have an order in to buy the option back at market if the stock price were to hit say $45.
I just want to protect myself from a stock gapping down and I'm left holding a stock that's worth $20 that I paid $45 for and I can't even write covered calls on it as its so deep in the money.I know I could trade a spread where my maximum loss is know from the start,but I figure by buying it back if there's a drop in price,and possibly rolling down,I'm only paying for that protection when I need it,ie if the price drops.
Also thinking at using an index etf as a dramatic drop in price is more unlikely than on a single stock.
Anyway I've got thick skin,tell me what you think,thanks in advance

I keep hearing that 90-95% of option contracts expire worthless. If that's correct, then you almost always want to be selling option contracts, not buying them -- unless it's part of a multi option position. So selling puts should be OK, but....

I'd only write naked puts on stocks I didn't mind owning if I had to buy them at the strike price less the premium I was paid. And with lots of margin in my account. My rule is to only use up to 25% of my margin. That way if something blows out, I'm not going to be getting scary emails or calls from my broker.

If you're talking about writing naked puts on stocks that are so volatile you're really concerned about a gap down, then you either shouldn't write them on those stocks, or else spend part of your premium to buy a put further out of the money. That way you put a ceiling on how much you can lose. A stop loss order won't protect you from a gap down, right? It doesn't matter whether you use the option price as a trigger or the stock price as a trigger. Either way, a gap will get you.

These guys TripleScreenMethod.com - Home claim to have grown "$35,000 to $2,019,055 in 38 Quarters" using naked puts and other tools. They'll show you how to do it for $25/month. I don't know much more about them, but I might want to check out what they're doing for a month or two. Take a look at their site. It's pretty interesting.

I think you're on the right track with writing puts on something like an ETF to avoid gap downs. I've written some and made some money on some of them. Just recently sold 5 30 day 10 oz. put contracts on xauusd and used the premium to buy 5 10 oz. six month calls on the same cross. Wrote and bought both at close to $1355/oz, which was the market at the time. I'll let the 30 day put expire, or go almost to zero, then sell another 30 day put which, hopefully, I can also let expire worthless. I'll try to make enough to end up owning my $1355 call option for free, or almost for free. Then I'll exercise my deep in the money call and end up buying 50 oz of gold way below market. That's the plan, anyhow.

Hope these ideas help.

 

[Vicorka]

I would not say writing naked puts is a bad idea. Yes, the margin is high and you have to maintain it. yet with right strategy it could be small but stable source of income. Lets say by having $20K you can make $500-$1000 month. Main points
- use out of the money options (more odds they expire worthless)
- write puts for the nearest expiration
- chose the strike price depending on the volatility level (higher volatility - deeper out of the money)
- Stay out of trading on very high volatility which is usual noted during the crashes and recessions - the risk is too high
- by selling naked puts on Friday before long weekends increase your odds
- there are many other small points that you will dig by yourself when you start doing it...

Previously I was subscribed to
http://www.options-trading-system.com/
now I am doing it by myself.

P.S. keep in mind that returns shown on the website above are what you get from the premium. Use their trade calculator to see the returns in the relation to the margin account.

 

[Splitlink]

Thanks for your reply,everything you say makes sense,especially the risk/reward on naked puts,which is why I'm so hesitent with the strategy

Socrates had a thread on this some years ago, now. A mod will put you onto it, it must be archived somewhere.

Writing a naked anything has unlimited risk. I'm surprised that you do not know this as you say that you have been dealing with covered options, I, too, did this but decided that it was not for me. Socrates insisted that he was making comfortable money out of it, but he did not convince posters. That was, I believe, his Swan Song and he left the site afterwards.

 

[aparoid89]

Good luck having the 5-10% non worthless options wiping you out. 20 years of steady profits all lost in 1 day.