As an option trading strategy, selling naked or short puts is highly risky and only recommended for experienced investors. There are differences between selling a cash-secured puts and selling a naked put. In either case, Ally Invest encourages you to stay mindful of the risks.
What is a naked put?
If you short a put, the put owner has the right to sell stock to you at the strike price until expiration. In exchange for taking on that potential obligation, you receive the option’s premium.
Let’s say you’re bullish on stock XYZ, so you decide to sell 20 XYZ put contracts to bring in a little extra income. Those 20 put contracts represent the obligation to buy 2,000 shares of the stock, should that obligation be assigned to you. However, if you don’t have enough cash in your account and you are forced to buy those 2,000 shares, that’s naked put selling.
If the stock declines below your strike price, you’d most likely be assigned. Then you’d be forced to buy 2,000 shares of XYZ at a higher price than it is trading for in the open market.
Unless you want to hold on to the shares of this stock, you will have to sell the shares at the prevailing market price to recoup at least some of your cash. That would leave you holding the bag for the difference between the strike price and the market price, multiplied by 2,000 shares.
Cash-secured puts mean less risk.
When you sell naked puts, the difference between your strike price and the going market price for the stock can mean substantial losses. On the other hand, selling cash-secured puts is a much less nerve-wracking approach. If you keep enough cash on-hand, not only are you prepared in the event of an assignment, but you’ve tapped into a method to buy stock that may also earn you a little extra income along the way.
Comment on this article
Anil V. on April 17, 2018 at 8:53am
Hi what are the benefits or contracts , of selling cash secured puts vs selling bull put credit spreads. thanks
Ally on April 17, 2018 at 9:59am
Hi Anil, there are benefits and considerations for both options. If you'll give us a call at 1-855-880-2559 or chat with us online at ally.com, a member of our Ally Invest team would be glad to learn a little bit more about your goals and discuss further!
Michael R. on July 30, 2018 at 11:37pm
I understand the idea of selling naked puts but due to the margin requirements I do not see why a person would not just do a bull but spread. Less risk and you can invest a lot less to make same or close to same amount of profit. Am I missing something important here?
John on July 1, 2020 at 9:18pm
Why don't you show how to do a cash secured put on your platform or is it manual where you have to sell a naked put but subconsciously keep enough money to cover it.
An on November 13, 2020 at 1:45pm
No answer to John's question? It keeps trying to execute it as a naked put even though I have cash in my account. Where can I allocate the collateral for a cash secured put?
Platform i. on April 30, 2021 at 9:17am
Still no answer to John’s question? If we could get some clarity on how to use a platform that is way behind the others in terms of UX and just general functionality that would be appreciated.
Ian W. on August 31, 2021 at 9:25pm
Still no answer to John's question? It's been more than a year and the platform still doesn't seem to support cash-secured puts. Or am I doing it wrong? (And if so, could you please explain?) Thank you!
Ally on August 31, 2021 at 9:26pm
Hi Ian, if you'll give us a call at 1-855-880-2559, a team member would be happy to learn more about your specific inquiry and further advise.