Naked put is a put option that is relatively risky. The seller can lose a lot of money if the stocks move in the opposite direction. On the other hand, the profit potential is huge if the stock moves in the right direction.
For example, if the stock is trading at $50, and the strike price is $40, then the option seller must then buy the stock at $40 if the stock expires below $40 at expiration. From this, you can see why an investor would consider the naked put as limited reward but high risk strategy. This is because the maximum profit opportunity for this is limited only to the premium that you receive from the sale of the option. For a fund manager, the naked put is not just about the unlimited risk and limited profit strategy.
When you sell out-of-the-money puts, you can buy the stock at a discount if the price of the stock drops. Then there is the premium, which is an additional income. Even if the option expires without value, you will get the premium from the options.
Here is another example that will make things clearer. Supposing you want to buy ABC stocks but believe that it the current price of its stock, which is $ 165.66, is undervalued. So you sell $160 puts at $10.20. You will then get $1020 ($10.20 x 100) per option. If the stock then drops to $150 and you get assigned, you will have to pay $160 per share for the stock. At $160 strike, your cost of ownership would be $16000 for the cost of the shares but $1020 profit with a net cost of $14980
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