Puts are written when the market is expected to go up, and the market tends to go up historically more than decline. Writing(or selling) a Put is sometimes used as a means of acquiring the underlying stock for less money. When an investor sells (shorts) a Put they are obligating themselves to have the stock Put to them at that strike price if the stock is trading below the strike at expiration. Generally, the stocks selected for selling Puts should be fundamentally sound and poised for growth. A Put seller should have the equivalent of the strike price in reserve, if it should be needed for stock purchase. Each brokerage firm may have different requirements on the cash needed for security.
Summary of Naked PUT Strategy1. Write PUTs only when you are bullish on the stock, index, or market in general.
2. Select candidates whose underlying stock is in an up-trend or has a recent BUY signal.
3. Select candidates whose fundamental outlook is positive and getting better.
4. Generally, the time to maturity should be no more than 2 to 3 months.
5. Out of the money options are most often selected since "in the money" options increase the probability of being exercised, even in a flat market.
Risk and Rewards of Being a Put Seller
With put options, you sell a right to another investor that allows that investor to put their stock to you (force you to buy) at a set price (strike price) before a certain date (expiration date). You get paid for this right in cash, today. If the stock stays above the strike price, nothing happens and you keep the money. Even if the stock drops to the strike price, there may be several ways to "rescue" your position while you make even more money, but you may have to pay the strike price for that stock.
The Risks... The biggest risk you run is that the stock drops below the strike price. Then you may be forced to buy the stock at that price.
If anyone has any questions, please email me.
Thanks
Ed
