What Is a Naked Put?
A naked put is an options strategy in which the investor writes, or sells,put options without holding a short position in the underlying. A naked put strategy is sometimes referred to as an “uncovered put” or a “short put” and the seller of an uncovered put is known as a naked writer.
The primary use of this strategy is to capture the option’s premium on an underlying security forecast as going higher, but one which the trader or investor would not be disappointed to own for at least a month or maybe longer.
KEY TAKEAWAYS
- A naked put is when a put option is sold by itself (uncovered) without any offsetting positions.
- When put options are sold, the seller benefits as the underlying security goes up in price.
- A naked put has limited upside profit potential and, in theory, downside loss potential that exists from the current price of the underlying all the way down to if it goes to zero.
- A naked put’s breakeven point for the writer is its strike price, plus the premium received.
How a Naked Put Works
A naked put option strategy assumes that the underlying security will fluctuate in value, but generally rise over the next month or so. Based on this assumption, a trader executes the strategy by selling a put option with no corresponding short position in their account. This sold option is said to be uncovered because the initiator has no position with which to fill the terms of the option contract, should a buyer wish to exercise their right to the option.
Since a put option is designed to create profit for a trader who correctly forecasts that the price of the security will fall, the naked put strategy is of no consequence if the price of the security actually goes up. Under this scenario, the value of the put option goes to zero and the seller of the option gets to keep the money they received when they sold the option.
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