Options Strategies: "Sell Naked Put" Stock Option Investment Strategy
There are a number of strategies with respect to options; however, the best strategy for an investor is often determined by his or her appraisal of the market.
The danger of the "sell naked put" option strategy is that it carries a lot risk (the extreme case would be if the stock price goes down to $0 at or before expiration). In other words, if the price of the stock falls below the strike price, the writer of the options is liable for the loss. Investors using the "sell naked put" stock option investment strategy are obligated to sell 100 shares of a given stock at the strike price, if the holder of the option decides to exercise it before or at the expiration date. A writer using the "sell naked put" strategy has his/her profits limited to the premium amount (minus commissions). Thus, the break even point for the "sell naked put" stock option strategy is the strike price, minus premium, less commissions.
Followers of the "sell naked put" strategy should sell options with lower strike prices when they are not entirely certain about the direction of prices, but are still confident that prices will not drop. If the investor is more certain that prices will not drop before the expiration date, then it is safer to sell options with higher strike prices (and therefore the premiums, and potential profits, will be higher). However, as the "sell naked put" option strategy has quite a lot of risk, it is not recommended for novice investors. This is especially true since margin is typically a requirement for those utilizing this option investment strategy.
By InvestorGuide Staff