CallWriter's family of Naked Put lists presents naked put trade candidates, in which the writer simply sells the put option uncovered:

A short call option is "naked" if the call writer does not own the underlying stock. But the short put is "naked" when the put writer has not sold the stock short. Here's the difference:

Short Call - covered by long position in underlying stock

 Short Put - covered by short sale of underlying stock

The covered call trade is a synthetic way of creating a naked put, and both trades have essentially the same risk-reward profile, although they are managed differently. Many brokers will require a higher level of option-trading approval for naked puts than for covered calls, even though neither strategy is more risky than the other. Remember that the put's value moves inversely to (the opposite of) the stock's price movement.

The naked put prospers when the stock moves very little or rises; it is therefore a neutral-to-bullish strategy. The naked put deteriorates when the stock falls, which is why it makes no sense to write the naked put when you are bearish on the underlying stock.

Here is how the naked put gains or loses value:

Time passes:	Time value decays with passage of time (theta).
Stock rises:	Put loses value as stock rises (delta).
Stock falls:	Put gains value as stock falls (delta).

When we write (sell) a naked put, the order used is a sell to open (STO). When we repurchase that put, to close the position, the order used is a buy to close (BTC).

Maximum Profit and Loss

Here are the maximum possible profit and loss in the naked put, assuming that the naked put is cash-secured, meaning it is not sold using margin, and that the trade is not modified in any way

Maximum Profit = Net premium received

Maximum Loss = Put strike - net premium received
- maximum loss assumes stock goes to -0-

EX 1: If we sell the Microsoft $20 Put, when the stock is $21.25, for a net premium of $1.50, our maximum possible loss is $18.50 ($20 - $1.50), the amount needed to cash-secure the position. The stock price is irrelevant in calculating maximum loss. Though the breakeven point in the position nominally is $18.50, this assumes that you don't engage in any trade modification to minimize the potential loss. If you confine put writing to strong companies you are willing to own, the maximum risk should be more or less a theoretical number except in times of a large market correction.

Naked Put		Covered Call
STO 20 Put Strike	20.00	Buy stock	21.25
20 Put Premium	- $1.50	20 Call Premium	- 2.65
Max. Possible Loss	18.50	Max. Possible Loss	18.60

In other words, if the stock is put to you at $20, you only incur a loss if you sell it below $18.50. Suppose the stock is $19 at expiration and is put to you at $20. Yyou would buy it at $20 and sell it for $19, which still leaves a $0.50 profit: 1.50 - (20.00 - 19.00) = 0.50.

Compared to Covered Call:
One who instead bought the stock at $21.25 and sold the ITM 20 Call for a $2.65 premium would have a maximum risk of $18.60 (21.25 - 1.25) in the position, very close to the risk in instead writing the OTM 20 Put. If the covered call writer instead sold an OTM put, he would have gotten less premium and, though he would have the opportunity to make a larger return he would also have a higher maximum risk.

Margin:
If the put is sold using margin, the risk of loss is the same but also would include interest cost on the margin funds used. However, if you put on a larger position using margin than you would have if securing the position with cash, the amount risked is correspondingly greater.

Positioning:
Nevver sell more put contracts than the number of underlying shares you want to own.

Writing a Naked Put

Naked puts are written primarily in one of two circumstances:

1.	The put writer is just seeking income and is neutral-to-bullish on the stock. He could write covered calls instead, but prefers the simplicity of just selling a put.
2.	The writer uses the stream of premium income to effectively buy the stock at a discount.

Because you could end up owning the underlying stock, it is important when writing naked puts (as it is when writing covered calls) to stick with top-quality stocks... stocks you would be willing to own or actively want to own, except you buy them at a discount by writing naked puts.

Selling a put and selling a naked put is the same thing, just different wording.

Most put writers write cash-secured puts, meaning that the broker requires them to secure the maximum possible loss with cash in the account. However, your broker may allow some degree of margin on naked put writes, in which case the write is far more profitable when successful but has the same risk as the cash-secured put, plus margin interest.

John's Tricks of the Trade

I am a firm believer in selling puts only after a stock has tested support on volume and is rising. Support usually is the trend line at the bottom of its trading range or the 50-day average, and frequently, both. This is a very high-probability trade, because the market is doing the heavy lifting. And the trade is not truly directional, because it does not depend on the stock rising for success. It also allows to sell an OTM put (below the stock price) that is at or perhaps a little below support. There is more on support below.

If a bear market is on, then the same technique is used. The market and most stocks will be rising and falling in waves, between identifiable trend lines. Once the stock has found support at a range bottom, it can be written - as can a covered call.

Do not sell puts when you are bearish on the stock or it is actually falling. Even if you think the stock is a buy, why not just wait and buy it lower? Once it seems to have found solid support, then write a naked put.

Strikes

OTM:
Savvy naked put writers tend to write out-of-the-money (OTM) puts, which have a strike price lower than the stock price, when written. In fact, a very productive technique is to write a put with a strike price at or below a strong support level; make the stock have to work to get to your put strike.

If the stock falls and is put to you at $20 when the stock is below $18.50 (breakeven), you are in a loss position. For this reason, you would be in a more secure position if the stock's support level were above the $18.50 breakeven. If the stock were to break support, you could react to it and close or modify the position. But if the next important support level is lower than breakeven - say, $17 - then you have to get into loss territory below your breakeven to see if the stock finds support.

ATM:
Writing an at-the-money (ATM) put strike brings in more premium than an OTM put and increases return, but also risk. Unless your goal is to buy the stock at a discount, you should be much more bullish than neutral to write an ATM put. The only real justification for this write is that the stock has tested support and is advancing anew.

Again, where is support? If it is above the $18.90 breakeven, there may be some reaction time to close or modify the position to eliminate or ameliorate a loss. If it is below the breakeven, waiting to see if the stock breaks support will be a white-knuckle exercise.

ITM:
To write an in-the-money (ITM) put, you would have to be quite bullish; better yet, the stock is advancing off a strong support level. The goal is not necessarily assignment, but to get a whopping put premium that you can buy back more cheaply as the stock rises before expiration than you sold it - for a nice profit. You have to be right about the stock's movement, of course, and the trade justification would be the same as in the ATM case, above.

This is an aggressive position! If the stock is lower than $25 at expiration, it will be put to you when short the 25 Put. Because this put brought in only $0.35 of time value (4.10 - 3.75 intrinsic value), you would be essentially gambling that the stock rises - lowering the value of the 25 Put - enough by expiration so that you can buy it back for a profitable close. But if the stock falls, your jeapordy increases. A fall in stock price from $21.25 to your $20.90 breakeven is quite plausible.

Support Levels
Many people do not seem to key naked put writes to the stock's nearest major support level. But stock prices can oscillate quite a bit. and a pullback below the put strike is not unusual when the put was close to the money when written. Closing the position in this situation can lead to a whipsaw loss, because the stock will in most cases promptly snap back. Put differently, the real danger is not that the stock is briefly pulling back below the put strike sold, but that it breaks support, handing us a real loss.

The way to avoid whipsaws is this:

• Sell an OTM put
• Below recent stock support level

This usually means writing further out of the money for a little greater margin of error rather than maximizing premium. However, if you write at or above support, there are management techniques to employ.

Resistance Levels
The converse situation is: don't sell a put close to a significant resistance level for the stock. The odds are that the stock will fail at resistance, particularly if it has failed there recently. This is too large a subject to cover here, but never place a naked put trade that in effect is a gamble on the stock breaking through resistance.

Simple Naked Put Trade Management

If the stock falls enough by expiration or close to expiration, the put writer must either be willing to  accept assignment of the stock or must adjust (manage) the position to avoid assignment.

1. Accept Assignment of the Stock and Write Calls

Since you want the stock, anyway, or are happy to own it (otherwise you should not be writing naked puts), you can accept assignment - and then begin writing calls on the stock. After all, you bought it at a discount. Writing calls further lowers your effective cost in the stock This technique is used when you are assigned the stock on a brief pullback and your rationale for owning it has not changed. This is a primary tactic for many, if not most, put writers.

2. Roll the Put Out

If you think the stock's pullback is temporary and basically a good sign (e.g., testing support for a fresh advance), then you might consider rolling the put out in time, meaning to buy back the put sold and sell the same-strike put for the next expiration month. The purpose of this move is to avoid assignment while bringing in more premium, since we will always get more premium for the same-strike put next month than it costs to buy back the current-month put.

EX 5: When Microsoft was $21.25, you sold the current-month May 20 Put for $1.50 in premium. Your maximum risk in the position is $18.50 (20.00 - 1.50). Now Microsoft has pulled back slightly below $20 and is struggling, close to expiration, so you are in danger of having the stock put to you at $20. You can roll the short put out to the next month (June). Assume it will cost $3.30 to buy back the May 20 put you sold for $1.50 and sell the same-strike June 20 Put in the next expiration month for $3.70.

EX. 5    Rolling the Put Out
STO May $20 Put	+ $ 1.50
BTC May $20P	- $ 3.30
STO June $20 Put	+ $ 3.70
Net Premium	+ $ 1.90

You pick up $0.40 in net premium on the roll out, which avoids assignment and adds to the return. You are creaming the stock for more premium. To employ this strategy you should be short-term bullish and view the stock as in a natural correction. If the stock is in trouble, this roll will not help in the long run and may distract you from closing the position.

3. Spread the Put

If the stock appears to be struggling or to be in trouble, consider spreading the short put - meaning to buy a put with a lower strike price than the one you sold.

EX 6: When Microsoft was $21.25, you sold the current-month 20 Put for $1.50 in premium. Your maximum risk in the position is $18.50 (20.00 - 1.50). Now Microsoft has pulled back slightly below $20 and is struggling. Suppose you buy the 18 Put for the current month, which would cost $0.90. This creates a 20/18 bull put spread in which you are short the 20 Put, long the 18 Put:

EX. 6      Spreading the Put
STO Short Put	20.00	+ $1.50
BTO Long Put	- 18.00	- $0.90
Strike Spread	2.00	+ $0.60
Max. Risk	1.40	(2.00 - 0.60)

This creates a $2.00 bull put spread (20 - 18). If the stock tanks, you will be assigned the stock at $20 but you now have the right now to sell it for $18. This changes your maximum position risk from $18.50 to the $2 strike spread less the $0.60 in net premium received, or $1.40. If it would cost $3.30 to buy back the 20 Put, which would turn the position into a $1.80 loss (1.60 - 3.30), why not instead buying the 18 put to spread reduces the maximum loss to $1.40?

Another advantage of spreading the puts is that if the stock hesitates and then heads back up, you can sell the short 18 Put at a relatively small loss and breathe easy, while still making a profit. OTM puts such as this 18 Put are rather slow to lose money.

In this case, if you sell to close the 18 Put for say, $0.50, you still have $1.10 in net premium:

1.50 + 0.50 - 0.90 = $1.10

However, if spreading the puts would present a maximum risk that is higher than just buying the naked put to close, then closing might be in order.

4. Close the Position at a Loss

The simplest management technique is to just close the position by repurchasing the put (buying it to close). The loss would be the buyback cost - your premium on trade entry. If the stock really is scaring you, for whatever reason (market or the stock's industry selling off, etc.), closing can be the best thing to do. You can't and won't win them all. Even if you were willing to own the stock on trade entry, your opinion may change with events.

On the other hand, if you close every position when the stock wobbles, you won't be in the game long, because stocks can wobble quite a bit. This is the reason for writing below a support level: you only close if the stock seems to be breaking support, in which case there is no reason to await delivery of the telegram - close.

On the other hand, if you were wrong to close because the stock pullback turns out to have been just a hiccup before advancing, consider putting the position on again - though your timing was a bit off, your judgment was sound.

5. The High-Profit Close

Ah, but what if the stock stays where it is, or better yet rises, just as you hoped? The short put will lose value as the stock rises, according to the put's delta. Now we get to deploy positive (winning) adjustments. Many put writers will elect to buy back the put once it has lost major value - at least half of the premium received on writing it.

If for example you sold the 20 Put for a $1.50 premium, taking on a maximum risk of $18.50, and buy it to close for $0.80, this is a $0.70 profit - a 46.6% return on the $1.50 originally received, and a 3.8% return on the $18.50 at risk.

EX. 7      The High-Profit Close
STO Short Put	20.00	+ $1.50
BTC Long Put	20.00	- $0.80
Profit		+ $0.70

Why do this instead of waiting for the put to expire worthless? Well, 1) the stock could reverse, turning an excellent trade into a loser, and closing the position terminates trade risk, and 2) especially when the position has lost major value due to the stock's rise, it may be possible to take the profits and find another good trade before expiration.

There are other strategies, of course, but these illustrate some of the basic ones.

Naked Put Lists and Other Strategies

Our Naked Put lists can also be used to identify trades that work well with other put-related strategies: bear put and bull put spreads. As naked put writers scan our NP lists, they see trades that would make good spread trades. Sometimes when writing naked puts or covered calls, a corner of the account will be left untraded, and a spread trade uses less cash - ideal for trading those account corners.

Also, you may not be quite ready for naked put writes yet and want to get a toe in the water by writing credit spreads.

If you are quite bullish on a stock over the short term, a bull put spread (credit spread) can work quite well, and the maximum amount risked is the net spread - the difference between the two put strikes less the credit received. It is created by selling an OTM put and buying a further OTM put, which creates a credit on trade entry. This is an ideal situation for a stock that has bottomed at strong support, on high volume, and appears to be recovering. Write the spread below the support level just tested for even more comfort level.

If you are quite bearish on the stock short-term, a bear put spread (debit spread) can also work quite well. In this strategy, we buy a put and sell a put with a lower strike price, which creates a debit on trade entry. The maximum possible loss is the debit incurred on placing the trade, and the maximum gain is the net spread - the difference between the two strikes less the debit incurred.

Yes, the long put will be expensive (that's why it is on our lists), but the short leg of the bear put spread should also bring in good premium, yielding a decent net credit.