Thursday, June 10, 2021

Why do Traders Like Selling Naked Puts?


So, why is it that some traders just love selling those naked puts?

Is it because they can just put in a "bid" to buy a stock that they have wanted for quite some time and "fix" the price that they are willing to pay for said stock?

Is it because selling a naked put uses up buying power but does not incur interest fees unless the naked put gets assigned?

Is it because traders just love that process of lowering their cost basis for stocks they want to own?

Do traders use the process of "selling naked puts" for income or merely for lowering their cost basis?

Can you make a "living" simply from selling naked puts?

How much money do you need to begin selling a naked put?

Do you need to understand the loan value of a stock before trading options?

If some of the above questions are things that have crossed your mind in your trading journey...you are not alone. There is a lot to learn about options, and the implications can be a great blessing or they can turn into a great liability.

Selling naked puts .....puts you "on the hook" to buy whatever stock you have sold those puts on.
Always remember  that just ONE contract of a put option represent the potential purchase of
ONE HUNDRED shares of the underlying stock. 

Sometimes I feel that these "no commission" trading platforms entice traders to play with option even when they simply are too "new" and "inexperienced" to understand the risks involved in option trading. They don't understand what devastation they can cause to their own financial health with just the click of a cute colorful icon on a trading platform. The platform is collecting their "cut", whether the newbie trader wins or loses. But the newbie trader, full of vim and vigor, can wind up bankrupt if they do not learn the ins and outs of options trading before they participate fully in the options market.

Trading options usually requires a "higher level" of "authorization" from your broker because you need an account that has "margin" approved and your broker should not be giving you access to option trading if you don't understand the basics of options trading. However, people do fall through the proverbial cracks and wind up trading options that they do not completely grasp. It has also become apparent over the past year or two that, newbie traders are sometimes being given access to massive leverage on these margin accounts, even with little to no apparent knowledge of the stock market or especially, little to no comprehension of the options market.

Be prepared kids, for getting assigned...because it does happen....just when you least expect it.
If you and your accounts can not handle getting assigned on a "naked put" position, you need to rethink your strategy, and/or hedge against that possibility. Or, only trade with the strategies that you understand to be "safe". Learn how to protect yourself, your money, your accounts, your incomes, and your credit rating. It is vital to your well being and livelihood.

Options are not for newbies. In my humble opinion, you should do a bunch of reading and take some or "a lot" of tutorials/seminars in option trading before you start really small, with low cost stock and with a very small number of contracts.....as in "one" contract.....until you really start understanding what options are and what risks they hold. Everyone has a different learning curve and ability to absorb new information. Don't be intimidated by those "young" traders you may see on youtube or other social media platforms, who claim to have learned these skills in a couple of months. It may actually take a few years to fully understand options. We all learn at different paces. It is possible that you may figure out that options trading is too complex and therefore too risky for you to implement. There is no shame in walking away from a strategy that is not suitable to your personality or temperament. We all need to play the games we understand....the trick is to admit to ourselves which games we understand...and stay happily in those arenas.

I value having a good night's sleep. Trading beyond your comfort zone and beyond your level of knowledge is a sure recipe for sleep loss. Protect yourself, your sanity and manage stress. Playing options with too much risk on the table is a nightmare. Don't do that too yourself. 

Now, here's the good part. Option trading can become an important part of your trading/investing strategy if you educate yourself well in advance. Option trading can help you even if you are predominantly a long term investor. It can help you augment your returns and/or limit your downside. Profit is always a good thing. Well, that's all for now. I hope you gleaned something of value from my chat.

Wishing you much success in your investing and trading.

Peace,
Carla.

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