Make Money At Home Selling Naked Puts

Sell Naked Put Options And Make Money At Home

This article will provide an overview of the concept behind selling naked (to open) put option contracts. This is a system that option traders utilize when the underlying price of the stock is forecasted to increase above the option exercise price (prior to the expiration date); you will make money with this strategy as long as the underlying stock price does not fall below your exercise price and force you into a margin call situation (discussed below).

In order to begin, you’ll need to deposit $2,000 into a brokerage account and agree to the terms of a margin account. A margin account ensures that a trader’s account balance meets the minimum requirement of the government and the brokerage firm. Typically, the minimum margin requirement is 20% (in cash or stock value) of the exercise price and 100% of the premium received. If the price of the underlying stock decreases below the exercise price, you will receive an alert notification (margin call) from your broker requiring that you add more funds, sell other stock, or close your position by buying-back your options (buy to close) at a loss. If you do not meet the margin call within 2-3 days, the brokerage firm reserves the right to liquidate other stocks (without your permission) in order to meet the minimum margin requirement.

Now that you’re all set up, here’s an example of how you would sell a naked put:

Let’s say that it’s March and you sell ten (10) contracts (1,000 shares of underlying stock) of a put option expiring in April (third Friday) for XYZ Company at an “out-of-the-money” exercise price of $50 and an option price of $1 / share; the stock is trading at $52 / share. The trade will make $1000 immediately ($1 X 10 contracts X 100 shares / contract).

Now let’s see how much of this money you can keep:

Scenario # 1: If the price of the underlying stock increases above your exercise price prior to the expiration date, you keep all your money and the buyer’s put option expires worthless. Congratulations, you have done your homework and were successful at making money at home! However, it’s not always that easy to make money online.

Scenario # 2: If the price of the underlying stock decreases below your exercise price, you will need to either buy-back your options at a loss or deposit more money into your margin account and hope the stock increases back above your exercise price by the expiration date. If the stock does not increase above your exercise price by the expiration date you will be subject to buying the stock at the exercise price, which is higher than the market price. Remember, the put option buyer has the power to obligate you to buy the stock at the exercise price if the value of the stock is less than your exercise price.

The biggest risk in selling naked puts is where the underlying stock suddenly collapses and you have to pay a lot of money to buy-back your options in order to avoid having to buy the underlying stock at the significantly higher exercise price (compared to the market price). In order to hedge against this potential scenario, many option traders opt to sell covered puts in order to make money online. This is where the underlying stock is sold short prior to the put sale; if the stock collapses, the stock will be bought at an exercise price that is lower than the short sale price and the investor actually makes money off the spread.

Although selling put options is an attractive strategy that does not require an initial capital investment, there are some calculated risks that are assumed with this strategy. In order to reduce your risks, you will need to have capital money at your disposal to hedge your trades. This requires that you make more money and potentially even capitalize on the bargain stock prices available during this recession. I can show you a quick online home business strategy that actually worked for me. I know, I know, I by no means am a home business type of guy, as stock and option transactions are my passion! What I found though was a simple and systematic online home business strategy that actually began to make me real money at home. It's called the "Independent Profit Center" (IPC) and it happens to be one of the best online strategies, along with a few of my favorite "spread options", that I've seen to make money online.

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