Option Trading Tip - Make A Promise & Get Paid Cash!
7167
Finance > Stock Market Trading
Mar 1, 2007
James Thomas
Option Trading Tip - Make A Promise & Get Paid Cash!
Writing Naked Puts is simply selling a put option on a stock that you would be happy to own should the price come down to your desired buy price.
When we write a naked put we are effectively 'promising' to buy someone else's shares in the future should the stock price fall below a certain level.
For doing this we are instantly paid spendable cash for each share that we 'promise' to buy. If the stock does not fall below this level (the strike price), then we simply keep the cash without having to buy the stock.
TIP:
Just like covered calls, only write naked puts on stocks that you would be happy to own and if you want to be more conservative, only sell the contract equivalent of the amount of shares you wish to buy, should the stock fall below the strike price.
As each option contract represents 100 shares of the underlying stock, you can work out how many contracts you can afford to write simply by dividing the amount of capital you want to invest in that trade by the strike price of the option you want to sell and then divide that number by 100.
Here's the formula:
Capital/Strike Price/100 = Number of Contracts
So if you have 20,000 to invest in one trade and let's say that the strike price of option is $10, then you can safely write 20 contracts.
By 'safely' I mean that you can afford to buy the stock should you be assigned.
Another thing to remember is that should you be assigned, you would effectively be buying your shares at a discount.
Let's say for writing the $10 put option, you received $0.50 cents per share (5% yield).
Because you receive this $0.50 per share, your overall purchase price (should you be assigned) is lowered by $0.50 to $9.50.
Should the stock fall and you be forced to buy it, a great way to keep this cash flowing and at the same time continue to reduce your risk is to simply turn around and start writing covered calls on it.
That being said, it's never a good idea in my opinion to write naked puts on a falling stock. Always look at a stock's chart for:
1) Moderate uptrends.
2) Sideways trends, especially 1-2 months AFTER a steep sell off.
If you go to: http://www.stockcharts.com and pull up the QQQQ chart for the first quarter of 2003, you'll find a great example of this second pattern.
During this time I began writing naked puts on the QQQQ and then when I was eventually assigned I then wrote covered calls on the QQQQ profitably for a number of months.
In sideways or rising markets, writing naked puts to potentially aquire stock (and be paid while you wait) and then writing covered calls on the stock when and if you are exercised, may well be the ultimate strategy for generating a cashflow income from the markets.
Also, considering that a large majority of options are never exercised, much of the time you may never even be required to buy the stock.
When it comes to writing naked puts, you often get paid for a 'promise' that you don't end up having to keep. Now that's what I call leverage!
Happy option trading and investing!
When we write a naked put we are effectively 'promising' to buy someone else's shares in the future should the stock price fall below a certain level.
For doing this we are instantly paid spendable cash for each share that we 'promise' to buy. If the stock does not fall below this level (the strike price), then we simply keep the cash without having to buy the stock.
TIP:
Just like covered calls, only write naked puts on stocks that you would be happy to own and if you want to be more conservative, only sell the contract equivalent of the amount of shares you wish to buy, should the stock fall below the strike price.
As each option contract represents 100 shares of the underlying stock, you can work out how many contracts you can afford to write simply by dividing the amount of capital you want to invest in that trade by the strike price of the option you want to sell and then divide that number by 100.
Here's the formula:
Capital/Strike Price/100 = Number of Contracts
So if you have 20,000 to invest in one trade and let's say that the strike price of option is $10, then you can safely write 20 contracts.
By 'safely' I mean that you can afford to buy the stock should you be assigned.
Another thing to remember is that should you be assigned, you would effectively be buying your shares at a discount.
Let's say for writing the $10 put option, you received $0.50 cents per share (5% yield).
Because you receive this $0.50 per share, your overall purchase price (should you be assigned) is lowered by $0.50 to $9.50.
Should the stock fall and you be forced to buy it, a great way to keep this cash flowing and at the same time continue to reduce your risk is to simply turn around and start writing covered calls on it.
That being said, it's never a good idea in my opinion to write naked puts on a falling stock. Always look at a stock's chart for:
1) Moderate uptrends.
2) Sideways trends, especially 1-2 months AFTER a steep sell off.
If you go to: http://www.stockcharts.com and pull up the QQQQ chart for the first quarter of 2003, you'll find a great example of this second pattern.
During this time I began writing naked puts on the QQQQ and then when I was eventually assigned I then wrote covered calls on the QQQQ profitably for a number of months.
In sideways or rising markets, writing naked puts to potentially aquire stock (and be paid while you wait) and then writing covered calls on the stock when and if you are exercised, may well be the ultimate strategy for generating a cashflow income from the markets.
Also, considering that a large majority of options are never exercised, much of the time you may never even be required to buy the stock.
When it comes to writing naked puts, you often get paid for a 'promise' that you don't end up having to keep. Now that's what I call leverage!
Happy option trading and investing!
Article Source: http://www.articlerich.com
James Thomas is a successful private option trader and creator of www.option-trading-tips.blogspot.com - an informative resource full of useful option trading tips, including free video tutorials.
Write a Review
Add to My Favorite
Refer it to Friend
Report Article
Other links owned by this user
You may or may not have heard of credit spread option trading but they can be used to profit in bullish, neutral or bearish conditions. They are a cashflow generating strategy that involves both the buying and selling of either calls or
Category:
Beyond all the 'hype' what it that makes option trading so good? Th a question that I wh more people would ask, but the thing not too many people know they even ext! The main reason that I love option trading
Category:
Writing Covered Calls is a conservative strategy where you buy a stock that you would like to invest in and then write a call option against that stock. This is a cash generating strategy that not only offers downside protection that you
Category:
In every professional field there are practitioners that have all the success they desire and those that struggle just to pay the bills. As a professional massage therapist for 6 years (now retired) I have experienced both of these
Category:
In basic erms here are only 2 ypes of opions you can rade, Calls and Pus. As a buyer of opions you always wan he underlying sock o go up if you buy calls and down if you buy pus. Deermining which way a sock is likely o go is
Category:
Writing Naked Puts is simply selling a put option on a stock that you would be happy to own should price come down to your desired buy price. When we write a naked put we are effectively 'promising' to buy someone else's shares in
Category:
Other links at Finance > Stock Market Trading
Introduction Ever since I retired at the age of 28. I have been doing a lot of thinking into these ?Tough Cases? of the investment world. What I present today hopes to unveil the most mysterious of them all, the Holy Grail of The Capital
Category:
Writing Naked Puts is simply selling a put option on a stock that you would be happy to own should price come down to your desired buy price. When we write a naked put we are effectively 'promising' to buy someone else's shares in
Category:
If you want be a successful penny stock trader, you?ll need to be an intelligent trader. There are very few requirements to start trading in penny stocks. It can be broken down into three main things. 1. Money: The money we are
Category:
Your stock trading rules are your money. When you follow your rules you make money. However if you break your own stock trading rules the most likely outcome is that you will lose money. Once you have a reliable set of stock trading rules
Category:
Both short term and long term trading can be effective trading strategies, however, long term trading has several significant advantages. These include the effect of compounding, the opportunity to earn from dividends, reduction of the impact of price
Category:
Site Sponsor
Directory Statistics
Articles: 68252
Categories: 501
Yahoo Entertainment
