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Options Theory: Trend Riding with Naked Puts

August 27, 2020

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On my recent visit to our Youtube channel, I held a class on how to trade naked puts. One of the tactics discussed was selling puts instead of buying 100 shares. The gambit increases your probability of profit and provides a gentler equity curve. In other words, selling a series of naked puts creates a less volatility equity curve than owning 100 shares of stock.

The most challenging piece for many traders is re-deploying the naked puts after they expire. If you came up as an active trader seeking low-risk entries, then you’ve trained your eye to wait for a fat pitch before swinging. This can work against you when trying to carry short puts month-to-month in a stock. Here’s why. You sell a put on XYZ and ride it to the week of expiration. Then your target gets hit and you buy to close the put. To maintain exposure, you need to sell a new one-month put. But as you inspect the price chart, you realize the stock is slightly overbought.

Now you’re caught between a rock and a hard place.

Rock: I’m supposed to sell puts every month to simulate owning stock.

Hard Place: But the stock is overbought, and I need a pullback!

The Dilemma

In this instance, suppose the hard place wins out. But rather than retrace, the stock proceeds to rip higher over the next three weeks. Not only did you not participate, you’re now even more paralyzed to sell a put.

Here’s what I suggest. If you’re trying to simulate long stock with naked puts (presumably because you like the stock long-term and want ongoing exposure, but want a higher probability of profit), then stay consistent regardless of what the chart looks like.

If the system you develop involves sequentially selling monthly 50 delta puts (or 30 or whatever), then do it. Every. Single. Month. When you exit one, enter the next, regardless of the chart posture. That’s the only way you’re going to capture what the long stock owner would get.

Here’s an example with Disney.

April 17th: I began to get interested in building a position in Disney due to the steep discount ushered in by the coronavirus. I started by selling the May $95 put for $2.45.

May 8th: I bought back the put at 30 cents. Rather than sell a June put, I actually purchased a partial position of stock at $108.58.

May 27th: Because of the overbought conditions and rapid gains accumulated, I sold the stock at $120.98.

June 1st: After pulling back, Disney began another upswing. I sold the July $105 put for $1.94.

July 9th: I bought back the put at 20 cents and immediately sold the Aug $105 put for $2.02.

Aug 4th: I bought back the Aug $105 put at 65 cents and sold the Sep $100 put for 99 cents. This gave me more breathing room heading into earnings plus a little more profit potential if DIS gapped higher.

Aug 5th: I bought back the Sep $100 put for 27 cents and sold the Sep $115 put for $1.11. This re-upped the profit potential.

Aug 26th: I bought back the Sep $115 put for 30 cents and sold the Oct $120 put for $1.69.


The execution wasn’t perfect, but it never is. I also flipped from naked puts to long stock at one point simply because I wanted to build a longer-term position. Note that once I exited the stock position (the fast gain was too tempting not to take), I quickly went back to selling puts to maintain some exposure.

This is how you stick with a trend and keep milking it. You can rightly point out that I should have just bought stock at the beginning and stuck with it. But I like the flexibility and higher probability afforded by the short puts. And, the margin requirement was less along the way.

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2 Replies to “Options Theory: Trend Riding with Naked Puts”

  1. Dennis Del Toro Dennis Del Toro says:

    Great explanation on your Naked Put Position on DIS Tyler. I’ve been dancing with Naked Puts as well for the past few months with KO and T. I’ve gotten my overall cost basis low enough near a Key Support Level to the point where I might just buy the shares and get the long term positions going.

    1. Tyler Craig Tyler Craig says:

      Nice, Dennis! Keep it up.

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