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NAKED PUT AND CASH SECURED PUT BASICS OVERVIEW

Once investors become more informed and educated, they tend to look for new and more exciting concepts and ways to trade the stock market. And these new ways to invest or to trade frequently leads to the concept of trading derivatives.

When it comes to trading the Naked Put (AKA “Uncovered put”) or the Cash Secured Put strategies, there are two main objectives that I investor or a short term trader may trade these two strategies.

First: Generate Income

Second: Purchase stocks shares at discount price

But first, we need to understand the concept of trading the naked put or the cash secured put strategies. When we say the word naked, it doesn’t mean that you are trading from your living room without your clothes, but rather trading derivatives without holding the underlying security. For example, we may sell a naked put or a naked call without holding the underlying of the stock traded.

Of course, trading derivatives can be a very advanced topic for someone that never heard the concept of trading derivatives before, but it is nothing that anyone can learn with the willingness to put effort to it and discipline.

And for those that are completely new to the subject of trading derivatives, the cash secured put strategy is just a derivation of the naked put strategy. The main aspect the differ the two strategies, it that when trading the naked put strategy option sellers normally use margin to and when trading the cash secured put option sellers set aside the fund to purchase the shares in case that the option gets assigned and assignment wouldn’t be a problem.

When trading the cash secured put or the naked put, the investor would be bullish on the stock and expect a temporary move up in price or trading sideways. If the stock goes up or keeps trading sideways, the option seller would be able to buy back the option solid for a cheaper price that sold and make a profit on the price difference.

The main reason that investor chooses the cash secured put or the naked put instead of putting a limit order to buy outright the stock, is that the stock may never correct itself or pullback to the investor desired price, so initialling the stock purchase through the cash secured put or the naked put enables the investor to capture premium until the stock eventually trade down to a desired price.

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By taking advantage of tastytrade\’s $100 to $2,000 bonus, you can get started trading today with the best option trader broker

CSP Trade Example:

Ticker: XYZ

• Today Date: 01/01/21
• Expire Date: 15/02/21
• Stock Price: 85
• 1 Short Put at the 75 Strike Price
• Premium received = $3.00
• # Contracts: 1
• DTE = 45 Days
• Moneyness: OTM
• Delta = 16
• Extrinsic Value (EV): $3.00
• Intrinsic Value (IV): $0.00
• Return on Capital (ROC): 4.17%
• AROR: 33.8%

By the way, if you want to learn how we analysis a business to trade stock and stock options please click on the link below

By reading this article we guess that you know or are aware of what trading derivative means or in other words what is trading short options. Because if not, please feel free to read our FREE article “ COMPLETELY GUIDE TO SELLING CASH SECURED PUT” where you will learn how to trade short options and more specifically cash secured put and naked puts.

Trade Maximum Profit:

•         Premium initially received

In this example or in any circumstance that an investor is selling premium or in other words selling options, the max gains would be always equal to the initial premium received for selling the option. In this example the investor maximum profit would be $300.

Trade Maximum Loss:

•         Stock goes to zero

In this example the investor maximum loss would be if the stock goes from the current price of $85 all the way down to zero, or in other words the business goes bankrupt.

Trade Break Even (BE):

•         Strike price – Premium received

The breakeven level represents the price level that an investor would start losing money if the price goes pass that level, and in this example the breakeven is $75 – $3 = $72 or -$7,200 per contract, so any price down to the $72 per share the investor wouldn’t lose any money, but any price below pass the $72 the investor would start losing money..

Payoff Diagram:

Trade possible outcome:

Time Decay:

The reason why the option seller makes money on both the bullish and sideways market is due to the fact of time decay. The passage of time will have a positive impact on trade, of course all other variables being equal. At the expiration date if the stock is trading above the strike price the option will trade toward its intrinsic value, which in the case of OTM options is zero, and once the option expires OTM the investor can get to keep the full premium collected for selling the option with no need to buy the option back to close the trade.

Also when trading derivatives, we need to keep updated our trading journal when selling short options, and we also need to make sure that we always manage our ITM trades by Rolling the trades for a Credit and not for a Debit, and you can also learn how to do it by reading the “HOW TO MANAGE CASH SECURED PUT” by just clicking on the link below and getting instant access to the article.

And if you want to be part of our community of investors and learn why our risk management methods are so effective, just click on the button below. Our methods enables us to change the rules of the game in our favor, so we don’t need to wait for the stock to come back to our sold strike price to be able to close the trade for a profit, but rather we can apply some of our advanced trade management and be able to meet the stock half way, enabling us to close the trade with more premium collected than the initial premium received at the beginning to the trade.

LEARN FOR FREE OUR TWO MOST POPULAR STOCK OPTION STRATEGIES

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Implied Volatility Rank:

Some investor may use, implied volatility rank (IVR), some investor may use implied volatility percentile (IVP) and some investor may use pure implied volatility (IV), but at the end of the day no matter what volatility approach we choose, we always need to make sure that we write our options during high volatility environment as volatility tents to revert to its mean over time. And with high volatility also comes higher premiums, so the bigger the premium is the better it is.

Days to expiration (DTE):

Here at unison trading, we normally write options with 30 to 45 days to expirations. But it\’s not a set stone rule or fixed guide, as we do write options occasionally with a long term duration like 12 to 19 months depending on market conditions.  And remember that this article is an introduction to trade the naked put and the cash secured put strategy, but there are a lot more inputs to the strategy that an investor should be aware of, so please don’t read this article and start selling options without a proper trading plan including an advanced risk management plan.

Assignment:

The biggest misconception about assignment is the risk involved to it, because an investor that sells naked put options on margin accounts shouldn’t be overleveraged themselves to a point of to be worried about assignment, because if someone is worried about assignment risk that means something is not quite right. And the investor that sells cash secured puts, should know that the amount required to buy the shares should be put aside to cover option assignment as it is one the best outcomes of the cash secured put strategy.

FAQ

Q: What is a naked put option?

A: A naked put option is a strategy where the option writer sells a put option without holding a short position in the underlying asset.

Q: What is a cash-secured put option?

A: A cash-secured put option is a strategy where the option writer sells a put option and maintains enough cash in their account to cover the potential purchase of the underlying asset if the option is exercised.

Q: What is the maximum profit potential of a naked put option?

A: The maximum profit potential of a naked put option is the premium received when selling the option. However, if the option is exercised and the stock price declines significantly, the potential losses can be substantial.

Q: What are the risks associated with writing naked put options?

A: The main risk of writing naked put options is the potential for significant losses if the stock price declines below the strike price of the option. Additionally, there is unlimited risk if the stock price continues to drop.

Q: How is margin requirement calculated for naked put options?

A: The margin requirement for naked put options is typically calculated as a percentage of the notional value of the option contract, taking into account factors such as the underlying asset\’s price, volatility, and expiration date.

 Conclusion:

There is a lot of miss information online about the cash secured put and the naked put strategy, especially involving risk. But don’t forget that like everything in life being misinformed can be a very risky thing when trying something new specially in finance. And trading derivatives, in this case options is pretty much the same, if you don’t know what you are doing, it means that you shouldn’t be doing it anyway. So, first educate yourself on trading derivatives, because when used properly derivatives can be a very good source of income.

When comes to trade stock and stock options there are lots of other functionalities and approaches to it, so these are just few characteristics that makes an option to be a very good option to trade, but we have other concepts that we take in consideration before trading options, especially the concept of high quality stocks, so if you are interested in learn in more details how we define and select business to trade stock and stocks options, just click on the link below and join our trading community.

PUT YOUR KNOWLEDGE INTO PRACTISE: JOIN OUT TRADING COMMUNITY

Here at Unison we show our Real Trading Statement Results and we dont hide anything from our clients … Real Statements from Interactive Brokers . Our Trading return goals are very Realistic & Achievable and Honest, that is why we are consistently profitable year after year.

If you are after honest traders that is really profitable and dont sell BS and unicorn type of returns for clients and would like to trade like a professional investor with the long term goal in mind, you are absolutely in the right place.

Here at Unison Trading we are not concerned how many trades we put a day but rather how many quality trades we have traded on that day, so please don’t expect to join us and hoping for daily adventure and excitement, we take our trading and business very serious as we find it the greatest opportunity for us to create/maintain wealth and this opportunity is not done by excitement but rather professionalism on everything we do.

Although, here at Unison Trading we don’t trade looking for excitement neither for having fun, we are very aware of the Law of Large Numbers (Number of Occurrence’s), as we always make sure that our number of occurrences are in place so the probabilities can play out. Remember that the maths doesn’t lie.

Why Follow our Trade Alerts

• 100% Real Broker Statement (Interactive Brokers)
• Consistently Monthly Income
• Realistic – Achievable and Honest Results
• Lower the cost basis of your portfolio (stock)
• 100% Transparency
• Generate Increased return on investment
• Control Stock without owing it
• Leverage Capital
• Reduce Risk

And of course the main thing as a professional trader, Be Profitable .

What You’ll Get

• Real-Time Trade Entry
• Real-Time Trade Exit
• Real-Time Trade Management

All streamed live straight to your WhatsApp, so you can just check the alerts and place the same trades with nothing hidden.

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YOU MAY ALSO BE INTERESTED IN READING AND LEARNING ABOUT OUR 5 CONCEPTS OF ANALYZING A BUSINESS TO TRADE STOCK AND STOCK OPTIONS

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