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You can go out and buy 100 shares of stock for $1,500, then sell those shares for $2,000. You end up profiting $500 on this trade, or $400 in total after accounting for the contract’s premium .
The seller's potential loss on a naked put can be substantial. If the stock falls all the way to zero (bankruptcy), his loss is equal to the strike price (at which he must buy the stock to cover the option) minus the premium received. The potential upside is the premium received when selling the option: if the stock price is above the strike ...
By selling the option early in that situation, the trader can realise an immediate profit. Alternatively, the trader can exercise the option – for example, if there is no secondary market for the options – and then sell the stock, realising a profit. A trader would make a profit if the spot price of the shares rises by more than the premium.
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Selling a naked option could also be used as an alternative to using a limit order or stop order to open an equity position. Instead of buying an underlying stock outright, one with sufficient cash could sell a put option, receive the premium, and then buy the stock if its price drops to or below the strike price at assignment or expiration ...
The new year is the traditional time to make resolutions on things we'd like to do better. And unless you're one of Warren Buffett's superinvestors who have already mastered the stock market, you ...
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