NAKED OPTIONS- PART I
By Michael Craig
While the focus of WinningInvestments.com is primarily covered calls, I do receive numerous questions regarding the different types of naked options. I have also found that even though investors may not a particular investment strategy or tool, the knowledge of different areas still proves useful in gaining an overall understanding of investing. This multi-part segment will highlight and explain the four different types of purely naked options. It will include buying naked calls, selling naked calls, buying naked puts and selling naked puts.
SELLING NAKED CALLS
Selling naked calls is a transaction where the investor simply sells calls on the open market. Unlike a covered call where the investor would own the underlying stock, with a naked call, there is no other purchase or ownership involved, and therefore the investor has a naked position. On the sale of a naked call, the seller “banks” the option premium, and then hopes that the price of the stock that the option represents falls before the strike date. If the stock price falls below the strike price then no buyers will want the stock delivered to them because they would be paying more than the current market price. This is a bearish transaction.
SELLING NAKED PUTS
Selling naked calls is a transaction where the investor sells puts on the open market. Of all of the naked option strategies, this one has the most in common with covered call writing. On the sale of a naked put, the seller “banks” the option premium, and then hopes that the price of the stock that the option represents rises before the strike date. If the stock price rises above the strike price then no sellers will want their stock purchased because they would be selling their stock below the current market price. This is a bullish transaction.
BUYING NAKED CALLS
Buying naked calls is a transaction where the investor simply buys calls on the open market. These buyers are hoping that the stock price rises significantly and that they will make substantial percentage gains on their purchase. If the stock is trading at or below the strike price on the strike date then the call will expire worthless. In this situation the investor has bought something that is now worth nothing. This is a bullish transaction.
BUYING NAKED PUTS
Buying naked calls is a transaction where the investor simply buys puts on the open market. These buyers are hoping that the stock price falls significantly and that they will make substantial percentage gains on their purchase. The more the stock price falls, the more valuable the put becomes. If the stock is trading at or above the strike price on the strike date then the put will expire worthless. In this situation the investor has bought something that is now worth nothing. This is a bearish transaction.
Future segments will explain these types of transactions in greater detail.
This is a segment of the newsletter where we will attempt to answer questions about covered call strategy and procedures. If have any questions about covered calls and NOT about particular stocks send them to michaelc@winninginvestments.com.
Naked Options 
