What is the risk when trading naked puts?
When you sell puts naked, your maximum loss is limited to the number of contracts you sell times the strike price of your naked puts. So if you sell five $50 puts, your maximum loss is going to be 5 x $50 x 100 = $25,000. However, this number is purely hypothetical and represents what would happen if the stock was put to you at $50 and then the stock dropped down to $0 leading you with a $50 loss. This is most likely never going to happen. Further, because you should ALWAYS exit when the stock hits the strike price of our naked puts, your loss is going to be much less and will be calculated as : (Price paid to buy the options back – price you originally sold them for) X the number of contracts traded X 100. So if you sold 5 puts for 50 and had to buy them back at $2.00, your loss would be ($2 – 50) x (5 x 100) = $750. Excluding the worst case scenario listed above, the stock could gap through your exit. The stock is at $52 and you are short your 5 $50 puts. The next day, the stock migh
