Naked Put Option Calculator
Strike Price
The strike price is the predetermined price at which the underlying asset can be bought in the future if the option is exercised.
Price Per Option
The price per option (aka Option Premium) refers to the premium that is recieved for writing the Naked Put option contract.
Contracts
The amount of option contacts written (sold), typically representing 100 shares. (Ex. A value of 2 here represents 200 shares)
Stock Price at Expiration
The anticipated value of the underlying stock at the end of the option's validity period.
Common Naked Put Questions
What is a naked put option?
How does a naked put option work?
What are the risks of selling naked put options?
When would someone use a naked put option strategy?
How is the profit/loss determined for a naked put option?
Disclaimer
Remember, trading options involves risks, and it's important to educate yourself about the intricacies of option trading before engaging in such strategies. Consider consulting with a financial advisor or doing further research to fully understand the potential risks and rewards associated with naked put options and option trading in general.
Example Naked Put Calculation
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.
Naked Put Option Pros and Cons
Benifits of Naked Put Options
Income Generation: Selling naked put options allows traders to generate immediate income through premium collection. This income can be especially attractive in stagnant or mildly bullish markets.
High Probability of Profit: The profit potential is limited to the premium received when selling the put options. This limited profit potential can be advantageous when traders expect modest price increases.
Flexibility: Traders can choose strike prices and expiration dates that align with their market outlook and risk tolerance, offering flexibility in their trading strategies.
Risks of Naked Put Options
Stock Purchase Obligation: If the option is exercised, traders must buy the stock at the strike price, potentially tying up capital. This can be a disadvantage if the stock's value depreciates further after purchase.
Margin Requirements: Brokers may require traders to maintain a significant margin account to cover potential obligations, which can tie up capital and limit trading opportunities.
Limited Profit Potential: While there's potential for income, the profit potential is capped at the premium received, which may not be substantial compared to the risks involved.
Market Risk: Traders face market risk, and if the underlying stock's price declines sharply, they might be forced to buy the stock at a higher price than the current market value, leading to immediate losses.
Overall, while naked put options can provide income and potential entry points for stock ownership, they demand careful risk management and a clear understanding of the market conditions.