As you can see, the Naked Put Profit and Loss graph looks very similar to the Covered Call risk-reward graph.

Short (sell) a put on a stock without being covered by shorting the stock or purchasing a secondary put. | |

This is a bullish strategy. You expect the stock to stay above the put strike price. | |

The Naked Put Strategy is an income generating strategy. The risk / reward profile is similar to Covered Calls. | |

Many investors use this strategy to generate income or to purchase stock at a discount. |

1. 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. Use the Naked Put Strategy to diversify your Portfolio with 4 or more different stocks.

6. 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.

Calculations of % Yield Naked

These calculations were developed for those investors that use a naked option selling strategy. If you write naked PUTs, these calculations help evaluate the return if the stock is not assigned to your account. It is assumed that the security for the transaction is cash and the amount of cash is the value of the strike price. In Covered Calls the security for the transaction is the stock purchased, therefore, the price of the stock and the premium are used as the basis. For naked writing, the security is the cash in your account, required by your broker, to potentially purchase the contracted stock for the exercised option. Therefore, the strike price is the security required. This calculation is called "% Yield Naked" and is basically the time premium divided by the strike price expressed as a percent. The formula is:

% Yield Naked = Time Premium / Strike Price

As an example if the current stock price of XYZ is $21 and the May 20 Put had a bid price of $1.00 then:

% Yield Naked (XYZ put) = 1 / 20 = 5.00%

The bid price was used since it is the price received on a market order sale of the option.

For the "in the money" PUT we need to be prepared to buy the stock that is PUT to us at the strike price even though the price is lower. Therefore, for the case where Stock XYZ is selling for $29 and the May 30 PUT is selling for $2.50 bid:

% Yield Naked (XYZ) = Time Premium / Strike Price

and

% Yield Naked (XYZ put) = 1.50 / 30 = 5.00%

The calculation for return for the naked "in the money" call is then based on the price of the underlying stock:

% Yield Naked (XYZ Call) = Time Premium / Stock Price

As an example if the current stock price of XYZ is $31 and the May 30 Call is selling for $2 bid then:

% Yield Naked (XYZ Call) = 1 / 31 = 3.23%

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