Suppose you are an options trader and believe that XYZ Corporation's stock, which is currently trading at $50 per share, will increase in value over the next few weeks. You decide to sell a naked put option.
Step 1:  Choose the Option Contract
You select a put option contract with the following details:
Strike Price:  $45
Price Per Option:  $2
Number of Contracts:   2
Step 2:  Determine Your Maximum Profit
The maximum profit for selling a naked put option is the total premium you receive:
Max Point =  Price Per Option x Number of Contracts x 100
Breakeven Point =  $2 x 2 x 100
Breakeven Point =  $400
Step 3:  Calculate Your Breakeven Point
To calculate the breakeven point, subtract the premium received from the strike price:
Breakeven Point =  Strike Price - Option Premium
Breakeven Point =  $45 - $2
Breakeven Point =  $43 per share
This means that the stock's price must stay above $43 per share for you to make a profit. If the stock's price falls below $43, your losses start to accumulate.
Step 4:  Determine Your Maximum Loss
The maximum loss for selling a naked put option occurs if the stock's price goes to zero. In this case, you would be obligated to buy the stock at the strike price. Therefore, your maximum loss is:
Max Loss =  (Strike Price - Option Premium) x Number of Contracts x 100
Max Loss =  ($45 - $2) x 2 x 100
Max Loss =  $43 x 200
Max Loss =  $8,600
Step 5:  Monitor the Trade
Keep a close eye on the stock's price movement. If it remains above the strike price of $45, you can potentially keep the entire premium as your profit. If the stock's price falls below the strike price, your losses will increase as the price moves lower.
Step 6:  Decide When to Close the Position
You should have a plan for when to close the naked put option position. If the stock's price starts declining significantly and you begin to incur significant losses, you may want to consider buying back the put option to limit your potential losses. Alternatively, you can wait until expiration if the stock price remains above the strike price.
Step 7:  Closing the Position
Suppose the stock's price indeed falls, and you decide to close the position before expiration. To do this, you would buy back the same put option contract you initially sold. The cost to buy it back will depend on the current market price of the option. If the option price has risen, you might have to buy it back at a higher price, resulting in a loss.
Disclaimer
Remember that options trading carries significant risks, especially when using strategies like naked put options. Always have a risk management plan in place and consider consulting a financial advisor or broker for guidance before engaging in options trading.