Has anyone tried this option strategy?...

I have done this with success but I prefer to sell naked when the market is low and volatility is high. Example: When QQQ was trading 20. and volatility was high I sold 15. and 18. puts on the Qs. I didn't want to chase the stock up so selling puts was the answer for me. I would have bought the stock at that price if I got exercised. Its easy to think selling naked is a sure way to make $ because time decay is in your favor and if the stock is rising you are doing great. The problem comes in when you sell far enough out of the money to play it safe, you are are netting very small profit for the risk you are assuming. If you would have bought the stock and held it during a down turn then selling naked is fine. Eventually it will bite you in the ass. You might sell a put at .40 a share and in 3 days have the stock gap down 3.00 now that put is selling for 2.90 will you buy it back right here or wait a few more days and see what happens. By then it could be up to 4.00 Take THC for example (Tenet Health Care) Stock is trading $50. it gaps down to $30 and you sell a few puts. In a week or two its trading 14. and you are dead. I would be alot more apt to sell puts on an index than individual stocks, less chance of killer gaps. I would be very careful of selling puts at the high levels we are at right right now and also volatility is low. not a good risk/reward. Watch your risk graphs and play it safe.

Happy Trading All
 
This topic was just discussed in another forum...

Saying that selling a put is 'more' risky than buying the stock is incorrect. If you buy a stock and the stock is halted due to an announcement of accounting fraud, poor earnings, etc. you'd still be holding the same issue as you would if a stock dropped and you held the short puts. If your goal is maximum appreciation on the upside by selling a put, you're doing the wrong thing - just buy the stock. If you want to sell options for premium income, knowing that you will only make the premium at most by your trade, you're fine.

Also, aphexcoil is correct in saying that you can just cover your naked sell by buying the lower priced put - max loss becomes the difference in strike price minus the premium received.

It's amazing how so many people are afraid of options and say that they are more risky to trade. This might be true for those that don't know the specifics of how they work, but the same could be said about trading stocks for people who don't know anything about stocks either?

Just make sure you know what you're doing before you enter ANY trade...
 
Quote from Breakout:

I just learned about an interesting strategy and was wondering
if any of you guys do this. Here's how it works...
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See the most recent posts under OPTIONS - Trend following system w/ Option writes

Trade naked puts on a regular basis and you will have a very short career. You take on nearly all the risk of the underlying stock, and give up nearly all the upside if the stock rallies. Looks good on paper, terrible in reality. Has probably ruined more traders than any other strategy in the market. You short a put on XYZ and think it can't get killed on bad news? Think again! You'll eventually end up with a load of crap in your account, frequent margin calls, and a lot of headaches. And for what? A little premium every month? Put your money in a 1% savings account and you'll be much better off.

If you have confidence in the future of a stock, then buy it.
 
Again lindq, I can see why you are trying to warn other novices of the risks involved in trading short options. There is risk. But spouting out information that is speculation at best i.e., "Trade naked puts on a regular basis and you will have a very short career" and "Has probably ruined more traders than any other strategy in the market" and "Put your money in a 1% savings account and you'll be much better off" doesn't do any good unless you're focusing on WHY a trader would want to trade short options.

For the trader who wants to make a ton from an upside move in a stock, yes, you're a fool to sell naked puts, just buy the stock instead. But for those who make a living off selling premium to speculators, you're telling them that their business doesn't work - which is just untrue.

If you don't know anything about the theory and details behind time decay, BS or credit spreads, stick to buying stock. Don't forget though: (quoting you) "You'll [also] eventually end up with a load of crap in your account, frequent margin calls, and a lot of headaches." It's not just option writers that get margin calls when they don't know how to cover their risk in a trade.

Hope that helps.
 
Quote from Trader Pete:

Again lindq, I can see why you are trying to warn other novices of the risks involved in trading short options. There is risk. But spouting out information that is speculation at best...
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My comments are not at all speculation...they are firmly based in reality...and I regret you feel that I am "spouting".

After 30 years of investing and trading, if I could share a single piece of wisdom with anyone it is this: naked options are a strategy with little potential gain and high risk of loss. I don't say this for any personal agenda, but to help others.

I've noticed that you focus on the equal risk of a short put and the underlying if the stock falls. But overall, the positions are NOT equal in risk. Absolutely not. Because the short put holder isn't giving himself an opportunity to enjoy the full gain in the underlying, which is what makes any system profitable over time. Participating in full gains is what overcomes the inevitable losses in any system. So again, what is a short put strategy? It is completely capping your gains, while exposing yourself to ALL losses.

Duh?!

It's a free market, and if one feels that they know better and can beat the strong odds against them, then hey...go for it.

But they've been warned.
 
Looks like covered calls to me and nobody would say that covered call writers all go broke eventually.

One involves buying stock selling calls, the other selling naked puts but as we all learnt in options 101 it's the same strategy.

Propaganda tells you 'selling naked puts is the worst' but then the same propaganda tells you 'covered call writing is a safe and often prosperous way to approach the game of investing'

Someone is wrong somewhere.

As I always say the key with options is really not the strategy you use, rather your call on the underlying market/stock
 
I think using naked puts is a good strategy IF you definitely want a stock at or below a given price and you will be holding the position for a while. If you are going to buy a stock at a given price and not higher, all this strategy does is lower your cost. You will miss some good runs when you don't get put to, but you would miss these runs anyway waiting for your price, and at least you got your premium. You will also lose when the stock tanks, but you would have lost with a long position too, and at least you have the premium. I think this is a good way to enter a position you definitely want to be in at a given price. The shorter the time frame, the less appealing this strategy would be.
 
Quote from Eldredge:

I think using naked puts is a good strategy IF you definitely want a stock at or below a given price and you will be holding the position for a while.
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I agree with you...this is the only situation in which selling a put even begins to make any sense, but even this has problems if bad news comes out and you are forced to take the stock or roll out for a loss. Whereas, if you had simply waited to buy the stock you may now have a nice opportunity.
 
Quote from aphexcoil:

Sell a strike $25 put
Buy a strike $20 put

You're out $5 - (profit from selling $25 - cost for buying $20)
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I'd rather sell a bear spread too. If the stock crashing down to $10, I'd not want to own it.
 
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