How Do You Get Naked Puts: A Complete Guide for Options Traders

What Are Naked Puts, Anyway?

Have you ever heard about naked puts and wondered what the heck they are? I was confused too when I first encountered them! Naked puts (also called uncovered puts or short puts) are an options strategy where you sell put options without having cash set aside to purchase the underlying stock if you get assigned. It’s basically selling the right to someone else to sell you shares at a specific price, and you collect a premium for taking on that obligation.

As someone who’s been trading options for years, I can tell you naked puts can be quite profitable, but they’re not for the faint of heart. In this article, I’ll walk you through how to get started with naked puts, the risks involved, and whether they might be right for your investment strategy.

The Basics of Naked Put Options

Before diving into how to execute naked puts, let’s make sure we understand what they actually are.

A naked put strategy involves

• Selling (writing) put options on a stock without having the cash reserved to purchase the underlying shares
• Collecting premium upfront when you sell the put
• Hoping the stock price stays above the strike price until expiration

When you sell a put option, you’re essentially agreeing to buy shares of the underlying stock at the strike price if the option buyer decides to exercise their right to sell. The buyer pays you a premium for this obligation.

Why Would Anyone Use Naked Puts?

You might be wondering why traders bother with naked puts at all. Here are the main motivations:

• Premium income: The primary reason is to collect the premium from selling the put
• Bullish outlook: If you’re confident a stock will rise or remain steady
• Leverage: You can control more shares with less capital

As one trader put it to me “Naked puts let me generate income on stocks I wouldn’t mind owning anyway, without tying up all my capital.”

How to Execute a Naked Put Strategy

Now let’s talk about how you can actually implement this strategy. I’ll break it down into simple steps

1. Choose the Right Brokerage Account

First things first, you’ll need a brokerage account that allows options trading. Not all brokerages let you trade naked puts because of their risk profile. You’ll typically need:

• Margin account: Cash accounts usually don’t permit naked options
• Options approval level: Usually level 3 or 4 options trading permission
• Sufficient trading experience: Brokers often require you demonstrate knowledge of options

2. Select an Appropriate Underlying Stock

When looking for a stock to sell naked puts against, consider:

• Stocks you wouldn’t mind owning: In case assignment happens
• Stable or upward trending securities: You want stocks unlikely to tank
• Appropriate price range: Make sure you can afford the shares if assigned
• Suitable volatility: Higher implied volatility means higher premiums, but more risk

3. Choose Strike Price and Expiration

This is where strategy comes in:

• Strike price selection: Lower strike prices reduce assignment risk but offer smaller premiums
• Expiration date: Shorter terms mean faster time decay but less premium; longer terms offer more premium but increase risk exposure

4. Execute the Trade

To place the trade:

1. Log into your brokerage platform
2. Navigate to the options chain for your chosen stock
3. Select the put option with your desired strike price and expiration
4. Choose “sell to open” (not “buy to open”)
5. Enter the number of contracts (each represents 100 shares)
6. Set your price (limit order recommended)
7. Review and submit

5. Monitor Your Position

After establishing your position:

• Watch the stock price: Especially if it approaches your strike
• Consider exit strategies: You may want to buy back the put if the stock drops significantly
• Prepare for potential assignment: Have a plan if you need to take ownership of shares

Important Calculations for Naked Put Writers

When dealing with naked puts, understanding the math helps you make better decisions:

Maximum Gain

Your max gain is limited to the premium received when selling the put. That’s it.

Maximum Gain = Premium Received

Maximum Loss

The theoretical maximum loss is substantial:

Maximum Loss = Strike Price - Premium Received (if stock goes to zero)

For example, if you sell a put with a strike price of $60 and receive a $2 premium, your maximum potential loss would be $58 per share ($5,800 per contract) if the stock plummets to zero.

Breakeven Point

The breakeven point at expiration is:

Breakeven = Strike Price - Premium Received

Using our example above, your breakeven would be $58 ($60 – $2).

Margin Requirements for Naked Puts

Here’s something many beginners don’t realize: brokers require significant margin for naked puts. Typically:

• Initial margin requirement: Usually 20% of the underlying stock value plus the put premium
• Maintenance margin: Can increase if the position moves against you

This means you’ll need to have sufficient funds in your account even though you’re not setting aside the full amount to purchase shares.

Real-World Naked Put Example

Let me walk through a practical example:

Let’s say XYZ stock is trading at $100, and you’re bullish on its prospects. You decide to sell one put option contract with a $95 strike price that expires in 30 days, receiving a premium of $3 per share ($300 total).

Several outcomes are possible:

Scenario 1: XYZ stays above $95 through expiration

• The put expires worthless
• You keep the entire $300 premium
• Your return on margin might be around 10-15% for the month

Scenario 2: XYZ drops to $90 at expiration

• The put is $5 in-the-money
• You’ll be assigned 100 shares at $95 per share ($9,500 total)
• Your effective cost basis is $92 per share ($95 – $3 premium)
• You’re currently down $200 on paper ($90 market price vs. $92 cost basis)

Scenario 3: XYZ crashes to $70

• You’ll be assigned at $95
• Your $3 premium offers little consolation
• You’re down $2,200 on paper

Risks of Naked Puts (And How to Manage Them)

I can’t stress enough that naked puts involve substantial risk. Here are the major concerns and how to handle them:

1. Assignment Risk

The risk of having to buy shares at the strike price is always present.

Management strategy: Only write puts on stocks you’d be willing to own at the strike price.

2. Substantial Loss Potential

If the stock drops significantly below your strike price, losses can mount quickly.

Management strategy: Set stop-loss orders or buy back puts if the stock drops past your comfort level.

3. Margin Calls

If the stock tanks, your broker might issue a margin call.

Management strategy: Use only a portion of your available margin and keep additional cash reserves.

4. Liquidity Issues

Some options have wide bid-ask spreads making exit difficult.

Management strategy: Stick to options on highly liquid stocks.

Converting to a Cash-Secured Put

If you’re concerned about the risks of naked puts, consider using cash-secured puts instead. The strategy is identical except:

• You keep the full cash amount needed to purchase shares set aside
• This eliminates margin calls but reduces your capital efficiency
• It’s generally considered safer for beginners

Who Should Consider Naked Puts?

Naked puts aren’t for everyone. They’re most appropriate for:

• Experienced options traders who understand the risks
• Traders with sufficient capital to handle potential losses
• Investors comfortable with volatility and market uncertainty
• Those with a moderately bullish market outlook

I wouldn’t recommend naked puts to new investors or anyone who isn’t comfortable with potentially significant drawdowns.

Alternatives to Consider

If naked puts seem too risky, consider these alternatives:

• Cash-secured puts: Same strategy but with cash set aside
• Put credit spreads: Sell a put but also buy a lower-strike put for protection
• Covered calls: If you already own the stock and want income
• Iron condors: A market-neutral strategy with defined risk

My Personal Take on Naked Puts

I’ve used naked puts in my own trading for years, but I’m super selective about when I use them. I only write puts on stocks I genuinely want to own at a discount, and I never use my full margin availability.

The strategy has been profitable for me overall, but I’ve had a few painful lessons along the way—like when a biotech stock I had puts on announced failed clinical trials and dropped 70% overnight. Ouch!

My advice? Start small, use wider stops than you think you need, and always have an exit strategy planned before you enter the trade.

Final Thoughts

Naked puts can be a powerful income strategy in the right hands, but they require respect and careful risk management. If you’re considering using them:

1. Start with paper trading to practice
2. Begin with small positions on stable stocks
3. Always know your max loss before entering
4. Have a plan for when to exit, both for profit and loss

Remember, there’s no free lunch in options trading. The premium you receive comes with obligations and risks. Be sure you fully understand what you’re getting into before you get started with naked puts.

Have you tried trading naked puts before? What was your experience like? I’d love to hear about it in the comments!