Naked Put Options

Function: Speculation

Outlook: Bullish

     When someone writes (sells) put options against stock that they do not own, the puts are called "naked puts."  They are naked because the seller does not have underlying stock or options to cover the put if the buyer exercises it, so they are "exposed."  If someone owns puts on a stock and writes an equal or lesser number of puts against the same stock, they puts written are not considered naked because the puts he owns are server as collateral.

     Since writing naked puts exposes the writer to the possibility of very high losses, most brokers usually require that the writer have a minimum cash balance in his account, usually $100,000 or more.

Naked Put Payoff Graph