The Options Playbook

Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between Ally Invest

Short Put

AKA Naked Put; Uncovered Put

Naked Put

The Strategy

Selling the put obligates you to buy stock at strike price A if the option is assigned.

When selling puts with no intention of buying the stock, you want the puts you sell to expire worthless. This strategy has a low profit potential if the stock remains above strike A at expiration, but substantial potential risk if the stock goes down. The reason some traders run this strategy is that there is a high probability for success when selling very out-of-the-money puts. If the market moves against you, then you must have a stop-loss plan in place. Keep a watchful eye on this strategy as it unfolds.

Options Guy's Tips

You may wish to consider ensuring that strike A is around one standard deviation out-of-the-money at initiation. That will increase your probability of success. However, the lower the strike price, the lower the premium received from this strategy.

Some investors may wish to run this strategy using index options rather than options on individual stocks. That’s because historically, indexes have not been as volatile as individual stocks. Fluctuations in an index’s component stock prices tend to cancel one another out, lessening the volatility of the index as a whole.

The Setup

  • Sell a put, strike price A
  • Generally, the stock price will be above strike A

Who Should Run It

All-Stars only

NOTE: Selling puts as pure speculation, with no intention of buying the stock, is suited only to the most advanced option traders. It is not a strategy for the faint of heart.

When to Run It

Bullish Neutral You’re bullish to neutral.

Break-even at Expiration

Strike A minus the premium received for the put.

The Sweet Spot

There’s a large sweet spot. As long as the stock price is at or above strike A at expiration, you make your maximum profit. That’s why this strategy is enticing to some traders.

Maximum Potential Profit

Potential profit is limited to the premium received for selling the put.

Maximum Potential Loss

Potential loss is substantial, but limited to the strike price minus the premium received if the stock goes to zero.

Ally Invest Margin Requirement

Margin requirement is the greater of the following:

  • 25% of the underlying security value minus the out-of-the-money amount (if any), plus the premium received
  • OR 10% of the underlying security value plus the premium received

NOTE: The premium received from establishing the short put may be applied to the initial margin requirement.

After this position is established, an ongoing maintenance margin requirement may apply. That means depending on how the underlying performs, an increase (or decrease) in the required margin is possible. Keep in mind this requirement is subject to change and is on a per-contract basis. So don’t forget to multiply by the total number of contracts when you’re doing the math.

As Time Goes By

For this strategy, time decay is your friend. You want the price of the option you sold to approach zero. That means if you choose to close your position prior to expiration, it will be less expensive to buy it back.

Implied Volatility

After the strategy is established, you want implied volatility to decrease. That will decrease the price of the option you sold, so if you choose to close your position prior to expiration it will be less expensive to do so.

Check your strategy with Ally Invest tools

  • Use the Profit + Loss Calculator to establish break-even points, evaluate how your strategy might change as expiration approaches, and analyze the Option Greeks.
  • Use the Probability Calculator to verify that the put you sell is about one standard deviation out-of-the-money.
  • Use the Technical Analysis Tool to look for bullish indicators.

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