btw start getting some decent option books, it's obvious you need to read up on the subject. McMillan might be a good place to start. Later on you might read Natenberg.
Answer: Would you rather lose $450 (spread) or $1,950 or more (naked position) if the trade gapped against you? Tip #2: Learn about modeling/risk graphing your potential trades with options analysis software.
Addition to the gap you may have to fight, IV will bve through the roof so those puts will be exploding in value. Whom ever suggested spreads is correct IMO. There is no real good reason to sell naked puts as retial investor when you can take in a bit less premium and have a floor on your losses.
Yeah we were talking gap risks which should be enough to compel a beginner to avoid jumping in to naked puts and did not even get to the IV risks of the naked puts. Adding in IV risks and it really is not the best way to start out trading options initially. Spreads cap max risk to a defineable level and significantly reduce vega risks to an extent.
What I forgot to add is that Xflat was right to raise the IV issue which I foolishly forgot to mention in my post.
Watch Dan Sheridan's webinar "Dan Sheridan's Bring in Monthly Income in a Volatile Market" http://oiwebcasts.cboe.com/portal/v_g.asp?G=5&events_page_num=3# Also, on the next page, "Enhancing Portfolio Income" http://oiwebcasts.cboe.com/portal/v_g.asp?G=5&events_page_num=4 You might try thinkorswim for a platform.
Thanks for the info, I will check it out. I heard many good thing about TOS, I currently do papertrade with CBOE but will switch to TOS for papertrade.
All good responses, here's one more - One thing you are missing is the loss befoe you get assigned. Here's what happens - - You sell the put and count the cash. Great! - After a week, the stock falls a couple of standard deviations. but still not to the put strike. However, the put has doubled in price. No fair! And now you're in the hole much more than you planned. Your account balance shows you down by what looks like ALOT. - The stock creeps down more. You tell yourself as long as it is above the strike, you'll hang in there. Oh - you haven't been able to sleep well for a couple of weeks now. - The stock touches the short strike. Should you buy the put back? It is triple what you sold it for now. But that theta stuff should help soon! If you hang in there the premium should dissappear because the stock can't drop anymore. Stupid market makers. - Stock keeps dropping, but you get some comfort that you always have a little money that you can make back, since the put always has time value. It's funny how it is always like that. - During expiration week the stock gaps down more. Your wife looks over your shoulder and notices you've lost three mortgage payments on the sure thing naked put strategy. Hilarity ensues. Game Over! I think that's how people that don't know much about IV and naked premium risks manage a trade like this when it starts to go wrong. Anyway, if your plan starts with counting how much money you have coming in, and ends there, you should stay far away from selling naked puts.
I think he would be selling call to finance his put all the way down. This is a doomdays scenerio that's never going to happen if the person doesn't over leverage with naked options. You can always repair and come out a small loser.