Writing Naked Puts (The Best Option Strategies) by Mark D Wolfinger

Author:Mark D Wolfinger [Wolfinger, Mark D]
Language: eng
Format: mobi
Publisher: Options for Rookies Books
Published: 2014-01-05T00:00:00+00:00

--If you are exceedingly bullish, this may not be the best strategy because profits are limited. However, you can afford to write a put with a higher strike price and attempt to earn the larger premium.

--If your expectation for the future price of the stock involves a specific time frame, then choose an option that expires within that time. Otherwise shorter-term options (one to four weeks) have relatively rapid time decay, and that is a good thing for the short-term trader.

TIP: Avoid very low priced options. The risk is too great and the potential profit is much too small. Do not overlook how much is at risk when seeking the reward (profit).

TIP: If you trade very short-term (one week) options, be aware that the rewards may come very quickly, but these options are not very far out of the money and provide a relatively small premium, so that a less-than-significant decline in the stock price may be enough to generate a large loss. You will quickly discover which expiration dates are comfortable to trade.

The biggest adjustment for very short-term put sellers is the holding period for the trade. Because options tend to have wide bid/ask spreads, and because you must overcome that bid/ask differential with each trade, short holding periods (less than a day or two) are contraindicated unless the stock makes a quick and significant move higher.

If your trade preference is to be in and out of a trade quickly, you are forced to trade options that expire in one week or less. If that turns out to be uncomfortable, then selling naked puts may not be appropriate. On the other hand, this strategy allows for a very nice profit coupled with a high probability of success when your prognosticating skills are working well.

If ‘short-term’ for you is ‘several weeks’ then consider writing options expiring in the front 2 months. A trader (vs. an investor) rarely writes an option with a longer expiration.

You may occasionally want to add stock to your investment portfolio (IRA account, for example). When that happens, write at-the-money puts (or even slightly in-the-money puts). Why the more aggressive strike price? Because, --as a trader --you have a short-term bullish bias. If that bias is based on a proven track record, then selling short-term puts should be more effective than short-term swing trading (you gain from time decay in addition to gaining when the stock price behaves).

Calculate the potential profit for each trade and proceed only when satisfied with that return on your investment.

Considerations when entering a trade

Example:

WXY, a reasonably volatile stock, is currently trading @ $30 per share.

Accept the following four statements as true:

1) Either you are an investor interested in buying WXY @ $27 or you are a trader who is interested in opening a bullish position near the current price level.

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