10 Ways to Sell Naked Puts Safely

Focus: OPTIONS

Kenneth Trester Image Kenneth Trester Editor, Maximum Options

“Naked” options writing brings substantial profit potential, but also high risk. Here are ten ways to help mitigate that risk and reap greater rewards when executing this type of strategy.

When it comes to options trading, it doesn't get much sexier than playing it naked. No, I'm not referring to what you wear (or don't) when you're sitting in front of your computer trading (that's your business alone). I'm talking about naked options writing.

While covered options writing ("covering" your option writing risk by owning the underlying stock) is a conservative strategy that offers only part of the benefit of options writing, naked options writing (selling options without the stock covering your position) allows you to reap all of the benefits and profit potential option writing has to offer. It doesn't get much sexier than that, people!

While the potential rewards from writing naked options are outstanding, and the odds of winning are strongly in your favor, there are some substantial risks. In fact, there is unlimited risk when writing naked calls, and extensive risk when writing naked puts—the risk that the underlying stock will move through and far above or below the options strike price.

This highly publicized risk scares many investors away from this strategy, and many naked options writers have lost their shirts (pardon the pun). But although the risk is real, it is usually greatly exaggerated, and if you follow the guidelines I'm about to share with you, you will control that risk and reap the rewards that this game offers.

Set a Bailout Point and Use It

A bailout point is the price, or the point in your strategy, at which you wish to buy back your naked positions in order to limit your losses.