Selling naked puts is a excellent strategy that can help you increase your return in the stock market. But is it a safe strategy? Aren’t stock options extremely risky after all?
Well when you buy stock options you are taking a great risk. But when you sell puts the right way you actually take less of a risk then you would have if you had decided to simply buy the stock. So, how can this possibly be?
Well let’s look into this strategy. When you sell a put you are giving someone else the right to buy a stock at a certain strike price. You do walk away with a nice option premium to take on this risk.
So if you sold the $45 put on a stock , let’s call it stock ABC, you would walk away with a nice premium and only be obligated to buy it if it closes below $45 by the time the option expires.
So if this stock closes at $48 or even $45.01 you are still not going to be obligated to buy the stock. Instead you will simply be able to walk away with the premium you sold. Hey it is free money!
Now let’s look at what happens if the stock goes down below this level. If the stock closes at $30 then you can be obligated to buy it at $45 taking a huge loss.
In fact your max loss would be $45. So it could potentially mean that you lose a large sum of money. So why do I still love to sell puts? The strategy can work extremely well provided two things.
1. You don’t mind getting into the stock
I would never sell a put on a stock that I would not love to own. In other words if I would love to hold onto the stock for the long term I might consider selling a put on it instead.
This way even if I do get called out the only thing that happened was that I got into a position that I wanted to get into anyways. I would also do much better than if I were to simply buy the stock because I would get money up front.
2. Can Afford to Buy the stock
Obviously if you can’t afford to buy the stock you are taking a large risk. What if the stock goes down to $30 or lower? You would simply have to take the loss possibly even wiping your account out.
I love this strategy, especially when I sell options on great dividend paying stocks which have terrific fundamentals. It isn’t for everyone but I love it because it gives be a win or win situation. I will either walk away with the premium from the option, or I get into a great stock which I do not mind holding onto for a little while.
Check out important information in the sphere of forex trading – make sure to go through the site. The times have come when proper information is truly only one click of your mouse, use this opportunity.