Selling Puts
- Thread starter pcgeek86
- Start date
Brosef, You are confusing the terminology of what a naked put is...
Naked Put = Uncovered Put = Put that is "Sold to Open"
I highly recomment paper trading with an actual program prior to putting forth any real money. This will make things perfectly clear w/o the costly mistakes.
Ok, well I understand the following:
-Purchasing/selling call options
-Purchasing/selling put options (assuming this is possible, as I'm being told ... Scottrade's terminology has messed me up though)
-The concept of writing a Naked Put
Here is how I understand a Naked Put based on past research:
Writing a contract in which you believe the strike price will not be hit. If it is hit, and you are "put," you must purchase and provide the stock to the contract holder.
Example: AAPL is currently trading at $97. As a naked put writer, you believe the stock price will not hit $100. You sell a naked put into the market. You receive the premium amount in your trading account. AAPL stock drops to $90, and the option expires after never hitting $100. The premium you collected is yours to keep.
^^^ Is that right? I don't think I'm stupid, but maybe I'm not getting some correlations between different terms.
-Purchasing/selling call options
-Purchasing/selling put options (assuming this is possible, as I'm being told ... Scottrade's terminology has messed me up though)
-The concept of writing a Naked Put
Here is how I understand a Naked Put based on past research:
Writing a contract in which you believe the strike price will not be hit. If it is hit, and you are "put," you must purchase and provide the stock to the contract holder.
Example: AAPL is currently trading at $97. As a naked put writer, you believe the stock price will not hit $100. You sell a naked put into the market. You receive the premium amount in your trading account. AAPL stock drops to $90, and the option expires after never hitting $100. The premium you collected is yours to keep.
^^^ Is that right? I don't think I'm stupid, but maybe I'm not getting some correlations between different terms.
you are allowed to sell back anything you went long. So if you are long a put, you can sell it to close it out. Scotttrade says selling puts or naked puts to ensure they use the two ways selling a put naked is referred to.
So their language refers to selling a put to open as a new position. You obviously can sell any put to close you are long.
P.S. if you have a naked put and the strike price is hit you are not automatically assigned.
So their language refers to selling a put to open as a new position. You obviously can sell any put to close you are long.
P.S. if you have a naked put and the strike price is hit you are not automatically assigned.
pcgeek, no offense intended btw..
let me put some
options are not like stocks. stocks are pieces of a company. they represent something tangible
so, unlike a share of a stock which represents a THING, a put or call is created "out of thin air" when somebody WRITES it and placces it on the market (offers it) or sells it at the best bid
that person has written an option. they are OBLIGATED to deliver what the option is written for.
they receive whatever the option was bought from them for (the premium) and nothing more.
the BUYER of an option, whether a put or call, has no obligation. however, he has the right to exercise the option, which will make sense for him if the option gets in the money and improves to a point that offsets the premium paid
the buyer cannot lose more than the premium
that is why many brokers don't allow you to WRITE options, whether puts or calls (technically, writing naked calls has unlimited risk, but the downside risk in naked puts IS defined (since a stock can't go below zero - but you get my point)
if you write naked options you can lose the entire balance of your account, and THEN some (depending on how many you write).
some allow you to write certain kinds of options - those that you have COVERED by ownership of stock
if you owe 5,000 shares of ABC company
and it is selling at $20 a share.
these brokers would allow you to write 50 COVERED calls, since your downside risk IS predefined (since if the stock price rises above the strike price, you can deliver your shares)
let me put some
options are not like stocks. stocks are pieces of a company. they represent something tangible
so, unlike a share of a stock which represents a THING, a put or call is created "out of thin air" when somebody WRITES it and placces it on the market (offers it) or sells it at the best bid
that person has written an option. they are OBLIGATED to deliver what the option is written for.
they receive whatever the option was bought from them for (the premium) and nothing more.
the BUYER of an option, whether a put or call, has no obligation. however, he has the right to exercise the option, which will make sense for him if the option gets in the money and improves to a point that offsets the premium paid
the buyer cannot lose more than the premium
that is why many brokers don't allow you to WRITE options, whether puts or calls (technically, writing naked calls has unlimited risk, but the downside risk in naked puts IS defined (since a stock can't go below zero - but you get my point)
if you write naked options you can lose the entire balance of your account, and THEN some (depending on how many you write).
some allow you to write certain kinds of options - those that you have COVERED by ownership of stock
if you owe 5,000 shares of ABC company
and it is selling at $20 a share.
these brokers would allow you to write 50 COVERED calls, since your downside risk IS predefined (since if the stock price rises above the strike price, you can deliver your shares)
You are talking about 2 completely different things here. A call option when BOUGHT is used to benefit from an increase in the stock's price, while a put option when BOUGHT is used to benefit from a decrease in the stock's price. Don't confuse that with exercise and assignment, which are a right and obligation respectively, belonging to a bought option at the start or a sold option.
The above is buying to initiate a position. Reverse it for selling to initiate a position. And the above example I quoted for yours is a mistake of a sell to open AAPL 100 call, not put. Naked options are most commonly referred to as SELLING to open a position.
Visit the Learning Center at http://www.cboe.com/LearnCenter/default.aspx.