Naked Puts are supposedly to be one of the riskiest strategies out there. But if done right selling naked puts can be even safer, and more profitable than buying stocks.
When you sell a naked put you take on the obligation to buy a stock at a certain price on or before a given date. For this you bank a premium up front.
Selling puts can be a good strategy as long as you do not go overboard. So if you sell naked puts on $ 50,000 worth of stocks, make sure you could buy $ 50,000 worth of stocks because you might have to follow through.
If you do it in moderation selling naked puts has the following advantages.
1. Stocks Do not Need to Go Up
When you sell naked puts on stocks you do not need need them to go up for you to be profitable. You only need the stock not to go down below your strike price.
This allows you to make money when you are having trouble finding stocks that are about to move up. Instead of having to worry about it you could always sell puts.
2. You Can Get Paid to buy a stock
If the stock does fall down below your strike price, you will have to buy it. But considering that you got the premium up front it means you got paid to get into a strong stock, which is much better than buying and holding the old fashion way.
And as long as the company has a good long term growth you can just wait for it to go back up, and sell covered calls on it to make even more premium.
3. Premium Adds Up
Collecting premium often adds up and can be very profitable in the long term. Many times you can make more by selling puts then you can by holding the stock.
Source by Shaun Rosenberg