and for the educated as well!
Might Be in Trouble: What happens when a Naked Put Expires?
- Thread starter zghorner
- Start date
actually that's not true. Selling cash secured put options can be a fine why to acquire equities under the right circumstances.
Yes i agree. There are many but here's an example. Stock you like to own is currently $50. But you'd like to buy at pull back at $45. Rather than wait, the option trade is to sell put strike $45 and get paid to wait by the premium received until stock price drops below $45 at option expiry. Then the stock is assigned at the strike price $45 minus the premium received.
Cash secured, fine but not nekid...
Seems a bit risky. If the stock has fallen whose to say it won't continue to fall...
That part of the risk is, of course, the same risk you take on if you were to buy the stock rather than sell the put.
Selling otm put vs buying stock is the scenario. This is better than paying current price. If there is no plan to buy the stock, don't sell the put. There's always a risk, but it's buffered by the put premium, and the lower strike price assignment. Think of it as buying at discount. Accounting 101 stuff..
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You may find it worth your while to look up the synthetic equivalent to naked puts, and then consider if your assertion still makes any sense to you.
Blue, I'm with Windlesham on this one. There's a difference between theory and practice.
The textbooks say a synthetic put is created by a covered call, which is what I assume you are reffering to.
But a covered call is equivlent to a cash-covered short put. Not a naked put where the amatuer seller doesn't have the cash to exercise. An important difference and there wouldn't be too many true naked put seller veterans in the market.
Classic case of picking up pennies in front of a steamroller. However, the odds are in your favor that the puts will expire worthless.