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The Unlucky Investor's Guide to Options Trading guides readers through the world of options and teaches the crucial risk management techniques for sustainable investing.

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What Are Naked Options & How Should Traders Use Them?

OVERVIEW

Short “naked” options are calls or puts that are sold that have nothing to limit their risk (shares of stock, long options). It is a bullish strategy when selling a put option and a bearish strategy when selling a call option.

Short Naked Put

DEFINITION

A Short Naked Put is a bullish strategy that is executed by simply selling a put option. It is a common strategy that can be used to buy shares of stock at a lower price, while keeping the premium collected if the stock price does not decrease.

PROFIT/LOSS CHART

SHORT-NAKED-PUT.png


DIRECTIONAL ASSUMPTION

Bullish

IDEAL IMPLIED VOLATILITY ENVIRONMENT

High

Short Naked Call

DEFINITION

A Short Naked Call is a bearish strategy that is executed by selling a call option without being “covered” by long stock or a long call option. Selling naked calls is an undefined risk strategy.

PROFIT/LOSS CHART

SHORT-NAKED-CALL.png


DIRECTIONAL ASSUMPTION

Bearish

IDEAL IMPLIED VOLATILITY ENVIRONMENT

High

SETUP

Short Naked Put

Sell OTM Put

Short Naked Call

Sell OTM Call

HOW TO CALCULATE MAX PROFIT / BREAKEVEN(S)

MAX PROFIT

SHORT NAKED PUT

Credit Received

SHORT NAKED CALL

Credit Received

BREAKEVEN(S)

SHORT NAKED PUT

Strike Price - Credit Received

SHORT NAKED CALL

Strike Price + Credit Received

tastytrade approach

Short “naked” options are calls or puts that are sold that have nothing to limit their risk (shares of stock, long options).

Since “naked” options have no options that are purchased against them, they benefit the most from the passage of time (theta decay) and any decreases in implied volatility (IV). As a result, the ideal environment for selling naked options in terms of the premium collected is when IV is high.

CLOSE / MANAGE

WHEN TO CLOSE

Profitable Short Naked Calls and Short Naked Puts will be closed at a more favorable price than the entry price (first goal: 50% of maximum profit)

WHEN TO MANAGE

When trading short naked options, selling an option of the opposing type (i.e. selling a call against a short put that is being “tested”) can be one defense mechanism. This reduces the directional risk of the position and collects more premium, which extends the break-even point.

If the trader’s assumption on the underlying has not changed as expiration approaches, the position can be rolled to the next expiration cycle to extend the time in the trade and collect more premium.

SUPPLEMENTAL CONTENT

Episodes on Naked Options

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