New Option TraderLearning how to be a successful option trader and blogging about it

I can hear it now.. naked puts are risky and dangerous — never use naked puts! Ever! That’s what we’re told when we’re first learning how to trade options, right? I know I’ve heard it more than once.

Well, there is a place for naked puts and it’s a good place — in an IRA. But, as long as you understand why you’re
buying them and what you’re trying to accomplish. Naked puts are a great way to acquire stock — stock that you want to buy, you’re GOING to buy anyway — at a lower price and a ultimately a higher ROI on the trade.

Normally, I’m not that into stock; too expensive. But, IRAs are a good place for stock and it’s still just as important to get the best return possible. You might hold a stock trade a little longer, but the purpose is still the same — to make a profit. So, getting the stock when it pulls back is a good thing because it increases your total return.

Key Points:

• If you’re going to use this strategy, you must want the stock — just at the cheaper price.
• You must have the cash in your account to buy the stock in case you get it at the cheaper price.
• This is a bullish stock acquisition strategy and not a bad way to to continually acquire stock that you intend to hold for a while.
• If you’re wrong about the direction of the stock, this trade can go against you because now you’ll be buying a falling stock on it’s way down. The goal is to buy a rising stock on a pullback but that is still in an uptrend.
• Your ROI will be higher due to two factors:
  1. The premium you receive from the naked put offsets the price of the stock
  2. Plus, you’re getting the stock when it pulls back, so it’s cheaper

How to Sell Naked Puts to Establish Long Stock Positions

1. Find a stock you like.  Use all your technical analysis skills and understanding of the company to determine to if it’s a good stock to own
2. Find the nearest available expiration date that has at least 23 calendar days to go. That may be the front month or it may be the next month.
3. Find the put option one strike OTM with a delta of 30-40
4. Sell that put short using a limit order. Selling this put short will give you the quickest rate of decay (in this case a good thing) relative to the highest probability of success.

By the way, I got this info from taking a free Options Planet class called, Options in Your IRA.  Options Planet is run by Think or Swim and they give these free classes because  they believe that an educated option trader is a successful option trader — what a concept!

One last thing… if your broker won’t let you do this, find another broker.  Think or Swim has no problem with it because they know this strategy is using cash secured puts and is just a more cost effective way of buying stock.