Naked put

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Payoffs and profits from writing a short put
Payoffs and profits from writing a short put

A naked put (also called an uncovered put) is a put option where the option writer does not have a short position in the underlying stock or other instrument. If the market price of the underlying falls below the strike price of the option, the holder can exercise the put option and force the writer to buy the underlying at the strike price for cash, profiting from the difference between the market price and the option's strike price. But if the market price remains at or above the strike price for the duration of the option, the option will expire worthless and the writer will profit from the premium charged to the buyer for the privilege of receiving the option.

The potential loss on a naked put is total, minus the premium received and the potential upside is capped. If the stock price stays the same or slightly increases then the put option seller profits and the option expires worthless. However, if the stock moves down, then the option premium increases, and it becomes more costly to close the put position.

Contents

  • Investopedia Staff, "Introduction to Naked Puts." "Investopedia" (March 1, 2002)


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