Name Your Price When Buying Stocks

Focus: OPTIONS

Dan Passarelli Image Dan Passarelli Founder, Market Taker Mentoring, LLC

If you want to learn to trade, here’s a really useful option strategy that all traders should know, says option trader Dan Passarelli of MarketTaker.com.

The Strategy
Let’s take a look at an option strategy that involves the selling of a put, often referred to as an uncovered put write or a naked put write. A naked put write is when a trader sells a put that is not part of a spread. This strategy is generally considered to be a bullish-to-neutral strategy.

The maximum profit is the premium received for the put. The maximum profit is achieved when the underlying stock is greater than or equal to the strike price of the sold put. Though this allows for a lot of room for error (The stock can be anywhere above the strike at expiration), note that the maximum loss is unlimited and occurs when the price of the underlying stock is less than the strike price of the sold put less the premium received. So, executing this trade in the right situation is essential. To calculate breakeven, subtract the premium received from the sold put’s strike price.

The Example
For our example we will use Apple, Inc. (AAPL). Apple just recently announced earnings and the stock dropped over $50. For this example we will assume the stock is trading around $460 a share.