Options Theory: Naked Puts
March 3, 2022
This video walks step-by-step through the naked put strategy and how to build it in Thinkorswim (TOS).
Naked Put
- AKA Short Put, Selling to open a put
- A higher probability alternative to buying calls or buying stock
- We’re selling a contract we hope expires worthless.
- Obligating yourself to buy stock at the strike price.
Bias
- Neutral to Bullish (0, +1), ideally high IV
- IVR above 50
Stock/ETF selection
- Most traders will focus on cheaper stocks/ETF
- Sell puts on the same ticker every month as an alternate to buying shares.
- Find a lower-cost, neutral to bullish stock with good volatility (GDX, FCX, XLE, XME, CLF, CCJ, F, AMD)
Structure
Sell 1 to 2 month puts. <45 days. Delta < 0.20. The lower the better. ROI 10%
Risk/Reward
- Max Reward: Premium Received ($1.00)
- Max Risk: Put strike – premium received ($45 – $1)
- Breakeven: Put strike – premium received ($45 – $1 = $44)
Margin Requirement
15% or so of stock price.
Probability of Profit
1 – delta (0.14) = 86%
Target
- Ride to expiration and let the put expire worthless. 56, 46, 36, 26, 6, 0
- Buy to close the put when you capture 80% to 90% of max profit. Buy limit GTC $0.10 or $0.05
Stop Loss
- Exit if stock breaks support, and you’re no longer bullish.
- Exit if stock breaks below the strike price and the put moves ITM.
- If you’re willing to buy the stock, let it ride. If the put is ITM at expiration, it will be assigned and you’ll buy 100 shares of stock.
$50 stock
Sell one-month 45 put for $1.00
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