Selling Naked

Discussion in 'Options' started by XM911E3, Jun 12, 2007.

  1. XM911E3


    Hi guys, would like to learn more about SELL NAKED. Please enlighten me. Thanks

    Example: CTSH currently trading @ $74

    Let's say, we know that it'll either go downwards or sideways for the next few months so we open a sold leg at $75 strike price and got a credit of $2.

    2 days later, the stock price went up to $77. At this moment, the option premium I have to buy back is $3.70. If now, I buy to close my sold leg, I will lose $1.70 ( $3.70 - $2 = $1.70 ).

    My question is what if I didn't close my sold leg position by expiration Friday, I will be assigned. What does that mean? Does it mean, I will need to go back to the market and use my own money to buy 1 share at $77 and sell it to the buyer at $75? Total loss will be $2. How about the credit I receive??? Please enlighten me. Thanks
  2. mnx


    you have the right idea about expiration, but it's not 1 share, it's 100 shares, and your loss therefore would be 200$.


  3. u21c3f6


    The credit is yours to keep. So in your example, you lose $2 in the exercise but you collected $2 in premium for a net of $0. (less commissions).

    As already pointed out, an options contract is for 100 shares.

  4. u21c3f6


  5. Gustaf


    I suggest you start out trying a covered call where you buy 100 shares and then sell one call against it. This will give you some working experience with options.

    Then read a few books.

  6. Make sure you have all your clothes off when clicking the sell button. Having underwear and socks on does not count.

    Any questions?

    Sorry, had to do it :D :D
  7. I suggest reading a few books FIRST before doing any option strategy.
  8. XM911E3


    Ok think I got it already. So if my strike price is $75, the market went up all the way to $77 and stays there sideways, on expiration Friday, $0 credit cause I will be assigned to buy the stock back at $77 and sell it to the buyer at $75. Hence loses $2 per share ( 100 shares ).

    Of couse the perfect senerio would be CTSH stays below $75 strike price and all will be time value and expires worthless by expiration Friday and I get to keep the premium.

  9. Don't use real money yet if this is your starting point. READ A LOT first.

    A lot of the people on this forum are more advanced, so learn some basics in books and even blogs before you lose your shirt trying to learn on the fly.

    I post about the naked puts I sell as do many other bloggers. See how we do it and learn from our successes and mistakes.
  10. XM911E3


    Sure will do what you says bro. Will do demo trade and read alot and learn from people here about the mistakes and the success. Do guide me along guys. Thanks :D
    #10     Jun 12, 2007