Beginner Question on Naked Put selling

A

AlphaGeneration

I'm considering selling naked puts but would like some help understanding the terminology/conditions for trading:

My broker has the following requirements when doing a naked put:

Initial requirements: 20% of CMV minus out-of-money amount or 10% of strike price, whichever is greater

Maintenance Requirements: 20% of CMV minus out-of-money plus premium, or 10% of strike price plus premium, whichever is greater

I have a margin account. Can someone explain both requirements (perhaps best through a basic example).

Thanks in advance- I appreciate the help.
 
A small piece of advice--use this technique only if you plan to own the stock. IMO, this is a great way to get into a stock at the price you want--you are paid for being patient. If you are planning to speculate with this technique, I suggest two things: use an index (spy, spx, es futures options) as your vehicle, and place bull put spreads, not naked puts.
 
Don't sell naked options, ever. In a week or less you can double or triple your money. In fact you can make 10x your money on a trade and in a quickness. You can and will lose as well. Therefore hedge all bets so that you know your maximum loss in advance.

You may think that well I will just get out for a small loss if the stock price goes against me. The reality is if you do this long enough you will wake up one morning and find that OTM you sold is slightly ITM and Delta is accelerating and that $2,000.00 premium you sold is now $8,000.00 underwater and going deeper.

Somebody somewhere sold 10 google 630 puts for a $17.00 premium and a month later he held on and next friday he has to pay $630,000 to own stock that is worth $90,000 less than the market for a loss of $73K on one trade. Now, the only way to escape the loss is to roll forward a month and pray it doesn't get worse.

This strategy is ONLY viable if you go deep OTM and you have the cash to purchase the stock you would love to own at that price otherwise it is a severe loss making prospect because when you buy the options back---ouch.
 
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