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options for income including covered
calls, selling naked puts, spreads and other option and stock strategies.
2010 / Strategy Article - Naked Puts
A Simple Naked Put
Here's a good place to
start when learning naked puts. In this example I
demonstrate selling a single naked put on a stock.
Looking through my
stocks I pick
Intel Corporation. I then look at the stock for the past
three months. If I look at the 10 day Simple Moving Average
I can see that it is above the 20 and 30 day Exponential
Moving Averages. The stock is in an uptrend. Normally I
would wait for a few days to see if there is a pullback.
However as this is an example, I will proceed.
3) Checking the put
options for April (2010) I see that the bids are, for the $21 strike
- $1.00, $20 strike for .55, $19 strike for 29 and the $18
strike for .15.
4) Checking the support
technical levels I see the following:
This tells me that in the last 80 days there has not been
much selling below 19.00. Looking at the chart above, I can
see that this is indeed the case. Selling the $19.00 strike
for .29 cents brings in 1.5%. As I would be comfortable
owning Intel at 19.00 I sell the $19.00 put for .29 cents.
If I could manage this same return for a 12 months period,
my annual return would be 18%.
5) I can see now that by
selling at 19.00 for .29 if I am assigned at 19.00, my cost
is actually $18.71. This is called my break even as anywhere
below 18.71 I am losing money on this investment. I can also
see that .29 cents is not a lot of protection in the event
that that stock takes a tumble.
6) Since I want to own
this stock I would be happy being assigned at $19.00. There
are many more aspects to this simple trade. If the stock
does not reach 19.00 or lower by April, I will not be
assigned and I can sell another put for May. If the stock
fell to 19.00 or lower, I could consider buying back the put
and selling another put further out in time for more
premium. If the stock fell below my break even of $18.71 I
could buy back the call and get out of the investment all
together, but that would most likely cost me more than .29
cents. Another strategy could be to accept the assignment at
$19.00 and then sell covered calls until I am exercised out
of the stock. I could also consider buying back the put and
rolling it to the next month or further out in time at the
same strike or at a lower strike.
There are indeed many strategies I can employ
to extend this simple put strategy. I plan to explore
various strategies on my site, so please come back soon.
That then is a simple put
example. The rest of the examples are more complex.