Naked puts are an option contract that allows the option seller to sell a stock without holding the underlying asset. This is done by selling the right to buy the stock on an upcoming date at a specified price in the future, without holding any financial instruments or the related rights and privileges of ownership.
Naked puts are also known as naked calls, naked put contracts or naked short sales. A naked put option contract is essentially a call option contract in which the option seller does not hold the underlying security, in this instance a naked short equity contract. The option buyer is not obligated to pay the premium on the option until he or she holds the underlying asset or does not exercise the option before the expiry date.
Naked puts generally involve sellers of call options with the rights to buy the underlying asset at a specified price within a defined time frame. The option buyer is usually an investment company, and therefore it does not matter whether the underlying asset is equities or fixed income securities.
Naked puts are commonly used for hedging, but they may also be used for leveraged trading. The risk and returns that come with naked puts depend heavily on the timing and size of the purchase.
Naked puts generally give the seller the right to purchase the underlying asset at a specified price on a future date for the price agreed upon. If the purchaser does not exercise the option, the seller has no option but to accept a corresponding loss in value.
Option sellers do not need to hold the underlying asset in order to use naked puts. These options are referred to as naked option contracts because they do not require the holder to hold the underlying asset as a security. The option seller holds the option directly with respect to the underlying asset and is not tied to a financial instrument, in other words an option contract does not require the seller to hold shares in any financial security. Therefore, naked puts give the seller a powerful tool to hedge his or her risk exposure and increase their profit margin.
Naked puts can be sold at a discount. The discount is generally referred to as the strike price, the lowest price at which the seller may sell the put and the buyer would buy it at on the expiration date if he or she exercised the option. When the strike price is above the value of the underlying asset, the risk premium will have no effect on the value of the option and the seller will receive the premium.
Naked puts are most often bought on days when financial assets are expected to move in the opposite direction. or if the price of the underlying asset is expected to rise.
When the option expires, the value of the underlying asset is compared with the strike price and the difference in value is subtracted from the option’s strike price. The difference is called the premium.
Naked puts allow the seller to take advantage of price swings in the underlying security without holding the underlying asset itself. This enables sellers to take advantage of price changes in equity. without the risk of holding the stocks themselves. Naked puts are often used to protect equity position from a competitor’s entry in the marketplace.
Naked puts are also useful for leveraged traders, who use them to offset losses in stocks or bonds. When the underlying asset declines in value, naked puts allow sellers of calls to gain exposure to equity while the investor retains the risk in bonds. While this may result in leverage, traders need not hold stock themselves in order to benefit from this strategy. An investor gains the benefits from the premium received from the sale of the naked option when the stock or bond becomes worth less than the option’s strike price.
Investors using naked option contracts generally use them to hedge their risk exposure in stocks, bonds or both. naked options provide traders with a way to gain exposure to the stock exchange without actually holding the stocks themselves. If a market falls, naked option contracts can be used to hedge the loss by allowing the trader to purchase and sell stock options that offset losses on the underlying security.