Hey Traders,
I hope you had a great Thanksgiving — and you’re recharged and ready to tackle the last few weeks of the year.
By the way, if you didn’t get to try my special method of preparing my Thanksgiving dinner plate, check it out here. I consider it the ONLY way to eat Thanksgiving dinner.
And even though Thanksgiving is officially over, you can still try it with all those leftovers you’re likely to have if you had feast as big as I did.
In any case, let’s dive into some trading. I’ve talked about Naked Puts in the past and it’s something that a lot of folks have asked me to cover more in-depth.
So today I want to break it down for you, make it simple to understand, because I know this stuff can seem tricky at first.
What’s a Naked Put All About?
Let’s start with the basics. A Naked Put is when you sell someone the right to “put” a stock to you at a certain price.
Essentially, when you do this, you’re selling someone the right to “possibly” make you buy the stock at a pre-agreed price by a certain date.
Now, I just said a lot, so let me break down the parts of that sentence:
- Selling – when you sell a naked put, the money you collect is called premium. You keep this money no matter what happens.
- “Possibly” – let’s skip this part for right now. I’ll come back to it later
- Pre-agreed price – when you sell the put, you choose a price at which you will agree to buy the stock. This is called the strike price.
- Certain date – The market price of the stock must go below the strike price (the pre-agreed price I mentioned above) by a certain date. That certain date is known as the expiration.
Ok, so now that we understand all the parts of the trade, let’s loop back around to why I said “possibly”.
The reason it’s “possibly” and not “definitely” is because the market price of the stock must do two things:
- drop below the strike price
- by the time the market closes on expiration day
If both of those things don’t happen, then the person that bought the option from you gets nothing.
And you, as the option seller, get to keep the full premium.
Why Go for Naked Puts?
Here’s why this is a smart move.
When you sell a naked Put, you get paid a premium right off the bat.
That money’s yours no matter what happens next.
It’s like getting paid upfront for a job you might not even have to do.
As I have said in the past, it’s like’s like “getting paid for a promise.”
Making Money from This
The big win here is letting those options expire without being worth anything.
As I mentioned before, if the stock stays above your strike price when the option expires, you keep the full premium and have no further obligation.
In my Premium Income Investor service, my win rate on Naked Puts is over 90%. When you do it right, that’s how powerful this technique is.
The Elephant In The Room
Ok, so it’s just free money, right? Well, not so fast!
No strategy wins 100% of the time. So let’s talk about the downside of Naked Puts.
The biggest thing I always hear when I talk about Naked Puts is that people have a deathly fear of being “put” the stock — or being assigned the stock.
As we’ve discussed, this can happen when the stock’s price dips below the strike price before the expiration.
The first thing I’ll say about that is that if you are doing this strategy the right way, you are first selecting a stock that is showing a strong upward trend.
A trend that is unlikely to be broken before the expiration.
It’s too much to cover here, but I’ve covered how to find stocks in a strong trend before.
If you do that the right way, you’ll find — as I have — that you are winning the vast majority of your trades.
But no strategy is perfect.
So next I want to cover what happens if a trade starts working against us.
Quick Exit Strategy Run-Down
- Stock Gets Put to You: If you are assigned the stock, you can turn around and sell it. Remember that the original premium you collected helps lower your cost basis. Factor that in when you do the math on how the trade worked out for you.
- Hold Onto the Stock: Some folks like getting the stock. Plus, it opens the door to another tactic — selling covered calls for more cash. If you want to hold on to the stock, you can sell out-of-the-money covered calls to collect premium. Or if you want to get rid of the stock fairly quickly, you can sell in-the-money covered calls that expire soon. Either way, it’s another way to generate cash with the stock you were assigned.
- Set Conditional Orders: If you’d rather keep your hands clean of the stock, set a conditional order. This is when you set an automatic order with your broker. In this case, you’d set an order to buy back the option you sold when the market price of the stock reaches $1 above your strike price. This will result in a loss, but you will not have to worry about being assigned the stock.
Wrapping Up
So there you have it.
This is a strategy I’ve been using for decades to grab income from the markets, even when stocks are not going up.
And now it’s a solid piece of knowledge you can add to your investing toolkit.
Remember, the only way you lose is if the stock drops below your strike price. So if the stock is going up — or even just moving sideways or a little bit down… you can still win.
That’s why’s I keep going back to this strategy again and again. It basically amplifies my odds of winning.
Trade well,
Jack Carter
