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Options Theory: Naked Puts, A Delta Perspective

August 12, 2022

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Today’s video shows how you can use the delta of a naked put to determine when you should roll it.

Notes: Naked Puts, a Delta Perspective

Long 100 shares of stock, Delta +100

Pro: unlimited upside. Capture $1 of profit for every $1 increase in stock.

Con: Probability 50/50. Open-ended downside.  Lose $1 for every $1 decrease in stock.

As an alternative to buying shares, I could do a covered call or naked put.

Pro: Increase probability, decrease risk

Con: Limit upside.

Sell 1-month, OTM put option for $200. Delta +20

Pro: Probability of Profit of 80%, Positive Theta.

Con: Limited upside, Level of exposure DECREASES as the stock rises.

Delta +20, +15, +10, +5

PRINCIPAL PROBLEM with naked puts vs. stock is you RUN OUT OF EXPOSURE.

To fix this problem you must A) sell more puts or B) roll up your old ones.

Progression: A) Sell 20 delta put then stock rises, put moves further OTM, delta falls to 5. B) Roll up the naked put by buying to close the old 5 delta put and selling a new 20 delta put. That re-ups my exposure.

Passive approach: Sell 1-month put, go away, come back in a month. Sell a new 1-month put. Go away, come back in a month. Problem: market returns are lumpy. Most months this works fine, but if market RIPS higher in a month you didn’t fully capitalize on the jump because your naked put ran out of exposure.

Active approach: Sell 1-month put, monitor. When the delta drops too low or the premium gets too low, especially if market is breaking and becoming more bullish, close the naked put and sell a new higher delta naked put.


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