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The writer (seller) of a put option is obliged to buy the underlying shares, at the exercise price. But only if thetaker (buyer) exercises the option. For accepting this obligation, the writer receives and keeps the option premium paid by the taker (buyer). This is whether or not the option is exercised.
The Naked Put strategy is one of the higher risk strategies. Profit potential is limited, while Risk (if unattended)can be unlimited. Due to this high risk, this strategy also has a correlation with high returns.It is a relatively simple strategy to understand. You
Sell to Open
a put option contract. If the option expires atthe end of its term, you profit from the position.It is a brilliant strategy if a few key guidelines are adhered to. But the complacent trader who does not respectthis strategy can lose far more than the money they put into the position.First, let’s recap what a Put option entails:
The put option contract gives the Taker (buyer) the right to Sell their shares, at a set price, on or before the expiration date. As the option writer (seller), you must buy shares if you are exercised, however, you receive premium from the taker for thecontract.
You Sell the option, to receive premium. Because a majority of options expire, there is a
youwill not have to close the trade before expiration.If the share price is trading below the strike price of the option contract, there is a high probability you would be exercised, and forced to purchase shares. For this very important reason, we use the Strike price as our StopLoss Exit point. As Naked Put writers, we do not want to be exercised and forced to purchase shares (unlessthis is the reason you are entering the strategy – stock accumulation).FMR Analysts also places profit taking orders on this strategy. If we can close out of this strategy early, wewill.