written by reader Basic information

By russelltbutler, June 26, 2012

I’m a complete newbie here, so if I missed what I am looking for I apologize.

I am looking for information on selling naked puts. Basic information. Like – is there a minimum size transaction – what on-line brokerage houses allow this – how much money is actually needed? Stuff like that.

Thanks for any info.

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Travis Johnson, Stock Gumshoe
June 26, 2012 3:46 pm

The CBOE has some good basic tutorials on options trading that you might find useful — they describe cash-secured puts here (it would be “naked” if you didn’t have cash backing it up, which would mean you would have margin — or borrowed money — backing it up, so the rules for that will depend on your broker)

http://www.cboe.com/Strategies/EquityOptions/CashSecuredPuts/part1.aspx

You can also do put spreads, buying a put below the one you sell at the same time, to limit your exposure a bit (that way, if the stock craters you know how much you’d stand to lose). Of course, that limits your income and potential return.

The only basic limitation is that you have to sell at least one put contract, which represents 100 shares, so your margin or cash must be enough to cover buying 100 shares at that price (or whatever portion your broker says you have to put up), and you also have to cover commissions — commissions can be an issue when you’re selling one or two puts on pretty steady blue chippers, because the income won’t be huge (the premium you get for selling the put isn’t that high, because everyone else also agrees that Intel would be a bargain if it fell 15% by September, for example, and probably won’t pay you much more than 25 cents a share ($25 per 100 share contract) to take that risk off their hands). With most brokers you get less of a commissions bite for options trading if you do larger amounts, so the per-share impact is smaller for 10 contracts than for one, but if you promise to buy 100 shares of Intel at $22 you’re putting up some portion of $2,200 in collateral to earn your $25 so the potential capital requirement is large. That doesn’t mean you necessarily have to have $22,000 in your account to sell 10 puts on that contract and generate your $250, but your broker needs to know you have the wherewithal — so either cash or a portion in cash and a margin line for whatever their calculation of your risk level is.

There’s a pretty good brief article from Investorplace here on the margin requirements, though it differs by broker and I haven’t checked the specific numbers they use: http://www.investorplace.com/2010/04/margin-requirements-for-selling-naked-puts/

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