There is so much written against the idea of selling naked options, however, can be opposed based on certain facts.
Most brokerage companies discourage the idea of selling naked options.
Most brokers talk against it.
But why? I still have to find the answer to that question.
I am also against the idea of selling naked calls but I love the idea of selling naked puts.
If you sell a naked call, stock may end up going way higher than you can imagine.
Either you will end up buying the option back at a much higher premium or buy the stock back at a much higher price, if the option gets exercised.
Reverse is true for the selling of put options.
If you have decided to buy a certain stock at a certain price, why not consider buying it a 1/2 price or less.
As I wrote before that the stock market in a short run has no logic.
It is driven by the forces of demand and supply which are influenced by greed and fear.
Let me explain this by a simple example.
Let us imagine a stock is trading at 5.
Its Jan.
09 put at strike price 2.
5 is selling at 0.
50.
The stock goes down to 1.
5 on the 3rd Friday of Jan 09.
You will be exercised on your put.
This will end up resulting in your buying the stock at 2.
5.
Now the stock will cost you 2.
0 (2.
5- 0.
50).
This was the stock that you intended to buy at 5 but now you end up buying it 2.
0.
The worst that can happen is that the stock will go to absolute zero.
So the most you can lose is 2.
00 which is an amount of $200 for a single option.
Now the stock has to go up only 0.
5 for you to break even.
It is quite possible that the stock may start going up from 5.
0 and you may never be able to buy the stock.
However, if you had sold puts for different stocks, you may end up buying one or the other stock at 1/2 price or lower.
Hence when you sell naked puts, there is a control on your losing if the stock goes down, and there is no control on your losing if you had sold naked call.
Most brokerage companies discourage the idea of selling naked options.
Most brokers talk against it.
But why? I still have to find the answer to that question.
I am also against the idea of selling naked calls but I love the idea of selling naked puts.
If you sell a naked call, stock may end up going way higher than you can imagine.
Either you will end up buying the option back at a much higher premium or buy the stock back at a much higher price, if the option gets exercised.
Reverse is true for the selling of put options.
If you have decided to buy a certain stock at a certain price, why not consider buying it a 1/2 price or less.
As I wrote before that the stock market in a short run has no logic.
It is driven by the forces of demand and supply which are influenced by greed and fear.
Let me explain this by a simple example.
Let us imagine a stock is trading at 5.
Its Jan.
09 put at strike price 2.
5 is selling at 0.
50.
The stock goes down to 1.
5 on the 3rd Friday of Jan 09.
You will be exercised on your put.
This will end up resulting in your buying the stock at 2.
5.
Now the stock will cost you 2.
0 (2.
5- 0.
50).
This was the stock that you intended to buy at 5 but now you end up buying it 2.
0.
The worst that can happen is that the stock will go to absolute zero.
So the most you can lose is 2.
00 which is an amount of $200 for a single option.
Now the stock has to go up only 0.
5 for you to break even.
It is quite possible that the stock may start going up from 5.
0 and you may never be able to buy the stock.
However, if you had sold puts for different stocks, you may end up buying one or the other stock at 1/2 price or lower.
Hence when you sell naked puts, there is a control on your losing if the stock goes down, and there is no control on your losing if you had sold naked call.