NAKED PUT

When the option writer doesn’t have any of the underlying asset/instrument and still feels bullish on the asset/instrument. The writer will sell PUTS of the respective asset/instrument by doing so collecting premium of the option sold.

Maximum profit: Premium received

Maximum Loss: unlimited if the asset/instrument moves in the downside

Example:

Assume XYZ company share is trading at Rs.1000. You analysis tells that the XYZ company downside is limited and it will start to move in the upside anytime and you want to open a long position on the XYZ company. You can create your long position in many ways. One such way is naked put.

This is done by selling ATM PUT/ITM PUT and collecting the premium. For reference assumes the premium of 1000 strike price PUT is Rs.10 and the lot size is 100.

Then the total premium received is 1000, this is your maximum profit.

CASE 1: Suppose at the end of expiry the XYZ Company is trading above Rs.1000, and then you keep the entire premium received.

CASE2: Suppose at the end of expiry the XYZ Company is trading at Rs.1000, then you keep all the premium received.

CASE3: Suppose at the end of expiry the XYZ company is trading below Rs.1000, Then you have to close you’re PUT with lose which is the difference between NEW PUT PREMIUM – PUT PREMIUM RECEIVED

For reference if the NEW PUT PREMIUM IS 25 then total =2500 and PUT PREMIUM RECEIVED =1000,

So total lose is 1500.

TWEAKS FOR NAKED PUT:

·        Never trade Naked PUT blindly trade this NAKED PUT strategy only if your confidence and highly bullish on the stock.

·        Always trade NAKED PUT with some stop-loss in relation with the spot price. This will limit your downside.