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March 12 2010  / Strategy Article - Naked Puts
Example Trade
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. 





Disclaimer: There are considerable risks involved in all investment strategies. Trade at your own risk.
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