What Is a Naked Put?
A naked put (or short put) involves selling a put option without owning the underlying stock. The seller receives premium upfront and takes on the obligation to buy 100 shares at the strike price if assigned. A cash-secured put is a safer variation where the seller holds enough cash to purchase the shares if assigned. Both strategies generate income and are used by investors willing to buy the stock at a discount.
Selling puts is one of the most popular income strategies among options traders. It is functionally equivalent to a limit order to buy the stock at the strike price, but you get paid while you wait. If the stock stays above the strike, the put expires worthless and you keep the entire premium as profit. If the stock drops below the strike, you buy the shares at an effective price below the current market (strike minus premium).
A cash-secured put requires holding enough cash to buy the shares if assigned (strike × 100). A naked put uses margin instead of full cash, amplifying both returns and risk. Most retail investors should use cash-secured puts. Naked puts require higher options approval levels.
Naked Put Formulas
- 1Premium income = $2.50 × 100 = $250 per contract
- 2Cash required = $95 × 100 = $9,500
- 3Breakeven = $95 - $2.50 = $92.50
- 4Return on capital = $250 / $9,500 = 2.63% (in 45 days)
- 5Annualized return = 2.63% × (365/45) = 21.3%
- 6If stock stays above $95: keep $250, no shares purchased
- 7If stock at $90: buy at $95, effective cost $92.50, paper loss = $250
| Stock at Exp | Assignment? | Premium Kept | Stock P&L | Net Result |
|---|---|---|---|---|
| $100+ | No | $250 | N/A | +$250 profit |
| $95 | Maybe | $250 | $0 | +$250 profit |
| $92.50 | Yes | $250 | -$250 | $0 (breakeven) |
| $90 | Yes | $250 | -$500 | -$250 loss |
| $80 | Yes | $250 | -$1,500 | -$1,250 loss |
Selling Puts for Income
- Selling puts is equivalent to setting a limit buy order and getting paid to wait
- Cash-secured puts require holding the full exercise amount in cash
- The strategy benefits from time decay and declining implied volatility
- If assigned, your cost basis is the strike minus the premium received
- Popular among value investors who want to accumulate shares at discount prices
Many income traders combine selling puts with selling covered calls in a cycle called 'The Wheel.' Sell puts until assigned, then sell covered calls on the shares until called away, then repeat. This creates continuous income from premium collection on both sides.
While the maximum theoretical loss is the strike price times 100 (if the stock goes to zero), significant losses can occur if the stock drops substantially. A $95 put on a stock that drops to $60 results in a $3,250 loss per contract, minus the $250 premium. Always be prepared to own the stock at the strike price.