When selling puts with no intention of buying the stock, you want the puts you sell to expire worthless. This strategy has a limited profit potential if the stock remains above strike A at expiration, but substantial potential risk if the stock goes down. The reason some traders run this strategy is that there is a high probability for success when selling very out-of-the-money puts. Keep a watchful eye on this strategy as it unfolds.

Maximum Potential Profit

Potential profit is limited to the premium received for selling the put.

Maximum Potential Loss

Potential loss is substantial, but limited to the strike price minus the premium received if the stock goes to zero.

Break-even at Expiration

Strike A minus the premium received for the put.

Margin Requirements

Margin requirements are different for naked puts versus covered puts, and they are subject to change, so you’ll want to be sure you’re checking the most up-to-date source. With Credence Global Bank Invest, you can find the most recent requirements on the Margin Account Details page. There you’ll find a chart outlining margin requirements for both short uncovered (naked) puts and covered puts, as well as other securities.

Implied Volatility

After the strategy is established, you want implied volatility to decrease. That will decrease the price of the option you sold, so if you choose to close your position prior to expiration it will be less expensive to do so.

You may wish to consider ensuring that strike A is around one standard deviation out-of-the-money at initiation. That will increase your probability of success. However, the lower the strike price, the lower the premium received from this strategy.

Some investors may wish to run this strategy using index options rather than options on individual stocks. That’s because historically, indexes have not been as volatile as individual stocks. Fluctuations in an index’s component stock prices tend to cancel one another out, lessening the volatility of the index as a whole.

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