20 lines
1.3 KiB
Plaintext
20 lines
1.3 KiB
Plaintext
Short Naked Puts
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Another trader, Stacie, has also been studying Johnson & Johnson. Stacie
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believes Johnson & Johnson is on its way to test the $65 resistance level yet
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again. She believes it may even break through $65 this time, based on
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strong fundamentals. Stacie decides to sell naked puts. A naked put is a
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short put that is not sold in conjunction with stock or another option.
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With the stock around $64, the market for the November 65 put is 1.75
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bid at 1.80. Stacie likes the fact that the 65 puts are slightly in-the-money
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(ITM) and thus have a higher delta. If her price rise comes sooner than
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expected, the high delta may allow her to take a profit early. Stacie sells 10
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puts at 1.75.
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In the best-case scenario, Stacie retains the entire 1.75. For that to happen,
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she will need to hold this position until expiration and the stock will have to
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rise to be trading above the 65 strike. Logically, Stacie will want to do an
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at-expiration analysis. Exhibit 5.4 shows Stacie’s naked put trade if she
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holds it until expiration.
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EXHIBIT 5.4 Naked Johnson & Johnson put at expiration.
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While harvesting the entire premium as a profit sounds attractive, if
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Stacie can take the bulk of her profit early, she’ll be happy to close the
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position and eliminate her risk—nobody ever went broke taking a profit. |