Might Be in Trouble: What happens when a Naked Put Expires?

[BlueWaterSailor]

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.

Mild correction: the important part is not that some textbook says it, but that it's a fact. Examining the P&L graph for both, or simply understanding put-call parity, should remove need to take it on faith.

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.

@Epicurus, there are two parts to this - and they're not in any way relevant to each other. Yes, the OP did something really silly by trading without having a clue about what he's doing - and made it much worse by doing it at scale. I don't think there's any argument or disagreement about that.

But you may want to review those text books for the other part. Put-call parity does not specify whether you have cash in your account or not. -P = +S -C ; that's the entire story, with no additional qualifiers. I'm certainly not the most experienced trader in the world, but I can guarantee that there are situations in trading where a naked put is exactly the right strategy... or it wouldn't exist at all.

(Have you ever noticed how "strategies" that aren't useful don't have a name? There's no "interlaced point-wide spreads all up and down the chain" strategy, or anything like "first 17 digits of pi worth of randomly-spotted puts and calls". But anyone trading options has heard of naked calls. I suggest there's a very strong reason for their existence.)

 

[GuerrillaTrading]

you should be selling covered puts (cash in your account) or bull put spreads. Outlook should be neutral to bullish. You should do it on a stock that you don't mind owning. If option expires out of the money you keep the credit, if expires in the money you get the stock put to you at a discount and in which you don't mind owning.

 

[El OchoCinco]

you should be selling covered puts (cash in your account) or bull put spreads. Outlook should be neutral to bullish. You should do it on a stock that you don't mind owning. If option expires out of the money you keep the credit, if expires in the money you get the stock put to you at a discount and in which you don't mind owning.

I always say it is not a discount if the stock drops more than a little.


You sell a $40 Put for $1.00 on a stock that is trading at $42.00. It drops to $37 by expiration and you are assigned.

Did you get the stock at a discount?

 

[viruscore1]

I always say it is not a discount if the stock drops more than a little.


You sell a $40 Put for $1.00 on a stock that is trading at $42.00. It drops to $37 by expiration and you are assigned.

Did you get the stock at a discount?

You have the setup wrong. You buy the stock at 42 vs sell 40 put for $1. Your loss would be $5 vs $2 in your scenario. It could have went up or stay flat or went down to 39.99. You can't start off with hindsight price of 37. Then you must give weight to all situations.

 

[El OchoCinco]

Why would you buy the stock at $42 and sell the put for $1? That is a double bullish position?

WTF are you talking about?

The poster said you use it to get a stock at a discount. Well if the position goes against you own a stock at a higher price then the current market. So the whole buy stocks at a discount is a misstatement that ignores the risk?

 

[viruscore1]

Why would you buy the stock at $42 and sell the put for $1? That is a double bullish position?

WTF are you talking about?

The poster said you use it to get a stock at a discount. Well if the position goes against you own a stock at a higher price then the current market. So the whole buy stocks at a discount is a misstatement that ignores the risk?

Read it again slowly out loud. For you maybe a few times. Then read intro to options trading. May help to take an options course, may i recommend instructor lead rather than CBT (computer based training). You know 'vs' makes it mutually exclusive. You can return to the corner in the back of the room now.

 

[El OchoCinco]

Read it again slowly out loud. For you maybe a few times. Then read intro to options trading. May help to take an options course, may i recommend instructor lead rather than CBT (computer based training). You know 'vs' makes it mutually exclusive. You can return to the corner in the back of the room now.

You changed the whole fact pattern. We are talking about selling naked puts to buy a stock at a discount and I showed an example where you would be getting the stock at a loss.

Then you came up with a completely different example.

Re read MY original post.

 

[viruscore1]

You changed the whole fact pattern. We are talking about selling naked puts to buy a stock at a discount and I showed an example where you would be getting the stock at a loss.

Then you came up with a completely different example.

Re read MY original post.

You don't understand my reply. You shouldn't be trading options or stocks. Try reading it again. Read it enough times, eventually it will sink in, or maybe not...

 

[El OchoCinco]

I dont need to read your bullshit because you misquoted mine. I made a simple statement and you came back with another completely different set of facts.


Shhhh adults are talking.

 

[viruscore1]

I dont need to read your bullshit because you misquoted mine. I made a simple statement and you came back with another completely different set of facts.


Shhhh adults are talking.

A few people got it. You're the only one that does not. Luv trading against ppl like you, Trade on! hahaha