Naked put
Investopedia Financial Dictionary:
Top
Naked Put
A put option whose writer does not have a short position in the stock on which he or she has written the put. Sometimes referred to as an "uncovered put."
Investopedia Says:
Naked puts are very risky since the writer can lose big if the underlying asset moves opposite to the desired direction. But, profits are huge if the underlying asset moves in the right direction.
Related Links:
An introduction to the world of options, covering everything from primary concepts to how options work and why you might use them. Options Basics Tutorial
Learn about a strategy that may be appropriate if you have a positive outlook on a stock. Introduction To Put Writing
Learn about this aggressive trading strategy that can be used to generate income as part of a diversified portfolio. Peekaboo! Call Writing Gets Naked
Compare naked strategies to credit spreads and see if the unlimited risk of going naked is worth it. Should Your Options Go Naked?
Understanding the concept of equivalent positions will help you trade more efficiently and save money on trade fees. Trade Smarter With Equivalent Positions
Find out why these enticing options can spell trouble for your bottom line. Naked Options Expose You To Risk
Wikipedia on Answers.com:
Top
Naked put
A naked put (also called an uncovered put) is a put option where the option writer (i.e., the seller) does not have a position in the underlying stock or other instrument. If the option buyer doesn't exercise on or before expiration, the seller keeps the option premium. Due to the risks involved, put writing is rarely used alone. Investors typically use puts in combination with other options contracts.[1]
If the market price of the underlying stock is below the strike price of the option on the day the option expires, the option buyer can exercise the put option and force the seller to buy the underlying stock at the strike price. That allows the exerciser to profit from the difference between the market price of the stock and the option's strike price. But if the market price is at or above the strike price when expiration day arrives, the option expires worthless and the put writer profits by keeping the premium collected when the put option was sold.
During the option's lifetime, if the stock price moves lower, then the option premium may increase (depending on how far the stock falls and how much time passes), and it becomes more costly to close (repurchase the put sold earlier) the position - resulting in a loss. The maximum loss scenario for the put seller occurs if the stock price drops to zero. In that case, the loss is equal to the strike price minus the premium received. Loss is not unlimited, as in the case of a naked call.
References
- Mark D. Wolfinger, "The Rookie's Guide to Options" The Beginner's Handbook of Trading Equity Options" W&A Publishing, Cedar Falls, 2008.
- John Brasher, "Writing Naked Puts I." "Money Newsletter" (December 15, 2005).
 |
This article uses bare URLs for citations. Please consider adding full citations so that the article remains verifiable. Several templates and the Reflinks tool are available to assist in formatting. (Reflinks documentation) (February 2012) |
- ^ Investopedia Staff (17 September 2009). "Introduction to Put Writing". Investopedia. http://www.investopedia.com/articles/optioninvestor/02/030102.asp. Retrieved 21 February 2012.
External links
- Chicago Board Options Exchange
- Australian Stock Exchange
- Investopedia, Options tutorial
|
|||||||||||||||||||||||||||||||||||||
This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)
Post a question - any question - to the WikiAnswers community:
Copyrights:
Investopedia Financial Dictionary
Copyright ©2010, Investopedia.com - Owned and Operated by Investopedia US, A Division of ValueClick, Inc. All rights reserved.
Read more
