I have noticed some sligthly OTM puts with a premium of $ 8.00 or above on some stocks which are priced around $49 and a strike of $48. Would it be a good idea of selling naked puts on them? If it drops below $48 you could be assigned but you might have a cushion till $40 ($48 (strike)-$8(premium)) before you suffer a loss, right?
Selling slightly OTM-Puts-Good Idea?
- Thread starter antares66
- Start date
On what planet?
Short put - Very limited upside, unlimited downside. And particularly dangerous for the inexperienced.
Downside is not unlimited, at least better than buying stock on the spot. When you sell otm put, if it is assigned, you entry price is lower than buying stock; if not assigned, you earn premium
Selling naked puts strategy- OWN stocks at a lower cost basis.
If you are using this as an income strategy across various stocks, you will most likely lose money sooner or later if you haven't excelled at risk management.
Like @lindq said: "particularly dangerous for the inexperienced".
It's the rookie mindset who sees the "good in evil". Stock is at $100 right now, it's totally fine to sell naked put for $3, coze even if if stock drops to $90, you would have lost more if you bought the stock. This way at least you get a cushion of $3 compared to the suckers who bought the stock directly at $100 and now they find their asset worth only $90.
Lemme explain to you why this explanation is totally wrong.
When you buy the stock TODAY at $100, there's an entire universe of possibilities of where it may go. Yes, it may drop to $90 and then you'd be better selling a put on it and getting $3 extra for being a sucker.
But YOU DON'T KNOW UPFRONT. The guys who buy the stock now at $100 as opposed to selling a put, can AND WILL have their asset worth skyrocketing to $110, $120, $200 sometimes.
You, the "genius" who sold a naked put are GUARRANTEED to miss that upside. You only sign in for losers. Whenever you HAVE to buy the stock as according to the contract is because you're a sucker and the stock isn't worth how much you pay for it. You will have to buy it at $90, $50, $10 sometimes. ALWAYS THE SUCKER'S SIDE. Never the upside.
Again, as @lindq said.
I´m only interested in the premium not the stock. Overall i hear buying calls or puts is a looser game because of time decay and implied volatiliy and the best way instead is selling cash secured puts to earn premium. But i know the risks if the stock drops below the strike price.
Horror scenario would be an overnight gap of 20-30%, so you have not the change to rebuy the put.
Horror scenario would be an overnight gap of 20-30%, so you have not the change to rebuy the put.
That happens often enough to make ALMOST any "sell naked put" strategy losing on average and a lurking catastrophe on occasion.
Correct. Then you get to have all the fun of owning a trashed stock and trying to work your way out of it.
Learn to trade the underlying before you consider options, short or long.
I dislike the use of the term unlimited. It is usually used by people biased again short selling, being that there is no theoretical limit on the upside. In practice it is complete nonsense. As to selling puts there is an obvious downside limit. The stock can only go down to zero. Hence both in practice and theory the loss is limited.