NAKED TRADING

By definition trading options NAKED means you do not own the stock in the case of writing calls and you have no downside protection in the case of writing puts.  This type of trading is risky and can generate costly losses if the trade moves against you.  This type of option trading is the most aggressive utilized by The Option Profit and is not recommended for any trader who isn’t very fluid and knowledgeable with all levels and aspects of option trading, most importantly the risks involved and the potential for losses. Below are several hypothetical examples of naked trading with both calls and puts.

CALLS

XYZ is trading at 100 and you write (sell) the 105 call for a $3 premium on the nearest expiration month, giving you $5 upside protection. For this example, XYZ stock closes at 120 on expiration and the person who is long the call exercises her right to buy your XYZ at 105. You have to go out in the open market and buy XYZ for 120, then sell it at 105 realizing a $12 loss.  This type of strategy would be used if an investor feels the underlying will move very little or decline in price.

If XYZ closes at 120:  buy at 120 - sell at 105 + $3 premium = (-$12)

PUTS

XYZ is trading at 100 and you sell the 95 put for a $3 premium giving you $5 downside protection. For this example, XYZ goes bankrupt and closes at $0 on expiration.  The investor who owns the put will exercise their right obligating you to buy the stock at 95, realizing a $92 loss.

If XYZ closes at 0: buy at 95 - sell at 0 + $3 premium = (-$92)

Refer to Glossary for terms and definitions

Option Profit members can elect to have trade ideas sent to them via secure email notification and have unlimited access to the features of their respective memberships.  All Option Profit Trade Ideas:

• Are sent in a timely manner
• Include strike prices and symbols
• Have estimated returns assuming expiration of the trade

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RISK is inherent in any investment. No individual or entity should invest with funds they cannot afford to lose. Option trading is time sensitive and involves risk including, but not limited to, loss of gains and principal. A leveraged investor risks the loss of  more than principal. Options do not have to be held until expiration and can be exercised at any point.  Option trades can be closed prior to expiration with a gain or loss being realized. It is important that you understand all trades and the risk associated before executing a transaction. The Option Profit provides broad ideas, not individual recommendations, and is not responsible for any losses incurred. Diversification is important with any strategy and should be considered when investing  Before trading consult with a financial advisor to determine if option trading is appropriate for you and your financial goals.