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What is Naked Put?

894 reads · Last updated: December 5, 2024

A Naked Put is an options trading strategy where an investor sells put options without having a short position in the underlying security. The seller in this strategy, known as a naked writer, aims to collect the option's premium by anticipating an increase in the price of the underlying security, without the intention of holding the security in the near term.

Definition

Selling put options is an options trading strategy where investors sell put options without holding a short position in the underlying securities. The sellers in this strategy are known as naked option sellers, who aim to earn the option premium by predicting an increase in the price of the underlying securities, without intending to hold the securities in the short term.

Origin

The origin of options trading can be traced back to ancient Greece, but the development of the modern options market began with the establishment of the Chicago Board Options Exchange (CBOE) in 1973. Selling put options as a strategy has been adopted by investors as the options market matured.

Categories and Features

Selling put options can be categorized into two main types: cash-secured put selling and naked put selling. Cash-secured put selling requires the seller to hold enough cash to potentially purchase the securities, whereas naked put selling does not require such preparation. Naked put selling carries higher risk because if the price of the underlying securities falls, the seller may face unlimited losses.

Case Studies

Case Study 1: In 2020, Tesla's stock price experienced significant volatility. Some investors sold Tesla put options to earn premiums, predicting that Tesla's stock price would continue to rise. Case Study 2: Before a quarterly earnings report, investors expected Apple's stock price to increase, so they sold Apple put options to earn premiums. These investors successfully profited from the selling put options strategy by accurately predicting market trends.

Common Issues

Common issues investors face when selling put options include losses due to incorrect market trend predictions and a lack of understanding of the high risks associated with naked put selling. Investors should ensure they fully understand the risks and potential losses before employing this strategy.

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