Are Naked Puts Risky Business? (Part 1)

The following is a post by Christopher Ebert, who uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. He studies options daily, trade options almost exclusively, and enjoys sharing his experiences with anyone who is interested.

Could Selling Your Options Naked Lead to a Divorce from a Buy and Hold Relationship?

Selling naked puts is considered by many to be one of the riskiest stock option strategies on Earth. The profits from naked puts are limited, while losses are potentially huge. To the everyday investor, one contributing to an employer's retirement plan such as a 401K, the riskiness of naked puts might appear to be in direct conflict with the traditional buy-and-hold mindset. However, after years of being married to mutual funds, being in it for the ‘long haul', such investors are most likely aware that their marriage has recently hit a rough patch. Difficult as it may be, maybe it's time to consider ending the marriage, or at least getting a trial separation. The only thing holding most back is the fact that a separation would mean parking their shrinking assets in cash, where they have low prospects of getting any meaningful action. True, with interest rates currently at historical lows, staying married to an investment ‘for better or for worse' probably appears more promising than the alternative. But, selling naked puts could be just the thing to fill the gap.

Naked puts often get a bad rap; and it may come as a surprise that they may actually be a good match for the more traditional method of investing. Buy-and-hold is perceived by many as the only way to go; it's what their parents did, it's what their employers recommend, and it's the advice encountered repeatedly in literature and other media. So, it is understandable that the perception endures; that only a crazy person would consider getting out of a buy-and-hold relationship to instead sell naked puts.

Perhaps one should consider questioning the reasons why naked puts have garnered such a poor reputation; after all, a covered call performs exactly the same as a naked put. But, by the amount of ......

Read the full analysis at Zentrader here