An uncovered option is an option trading strategy. If you have already been selling covered calls, then why not make income on the exact opposite option strategy and sell a naked put?If you have your eye on a a stock that you want to purchase, but it is at the height of its trading range, why not sell a naked put? It sounds a bit racy, but it is really quite easy to understand. For example an investor somewhere already owns an oil company stock that you want to purchase but you’ve been waiting for the price to go down from its high of $40. Instead of waiting, you will sell a naked put to this investor with a strike price of $36 which expires in six months.
These puts are selling for 50 cents each. This means that he will pay you $1000 for your agreement that you will buy his 2000 shares from him for a price of $36 anytime over the next six months.
The Advantages For The Seller
Why would he do it?Because he is basically writing himself an insurance policy in case the stock drops below $36 per share over the next six months as you have guaranteed him that you will pay $36/share.
The Advantages For You – The Buyer
What do you gain? First you get the $1000 put premium and that’s yours to keep.Basically, you have been paid to wait for the stock to become cheaper as you will be required to buy this investors shares at $36 if the put contracts are excercised.
If the price never drops to $36, then you just keep the premium.Then once you own the stock, why not sell some covered calls? So, if you are going to buy a quality stock anyway, make some put money while you wait for a good entry price by using this uncovered option strategy of naked puts.Ask your broker about his company’s account requirements for you to begin trading naked puts today.
You could also sell uncovered calls. This is also known as shorting a call.Basically, you are selling a call option to someone with a strike price higher than the current stock price.You are betting that the stock price will go down. But, if the stock price goes up beyond the strike price you will be required to supply the stock.The brokerage industry sees uncovered calls as risky and therefore they have account requirements such as minimum account balances.