Naked Put Option Screener

Hi, and welcome to the Options Learning Center. I'm going to show you how to sell naked puts and use Barchart to get the most out of the strategy.

What Is A Put Option?

A put option is a contract that gives the holder the right to sell an underlying asset at a specific price, known as the strike price, at or before a specified time (the expiration date.) The buyer pays a premium for this right.

• Put Option: Contract to sell an asset
• Right to sell at a specific price (strike price)
• Sell by a specified time (expiration date)
• Buyer pays a premium for this right

What Is A Naked Put?

A naked or short put is an options trading strategy in which the trader sells (writes) a put option without owning the underlying asset. A trader selling an option is said to be “short,” while buying an option means being "long."

The seller of the put option receives a premium in exchange for the obligation to buy the underlying asset at the strike price if the option is exercised.

Also, a trader selling naked puts must have enough margin to cover the purchase of the underlying security if assigned.

• Naked/Short Put: Sell without asset
• Selling = "Short"
• Buying = "Long"
• Seller gets premium
• Sellers must cover the purchase

Trade Examples

Here's a sample trade using real data from Barchart to help you understand how selling a naked put works.

Entering the Trade

Let's say you want to screen the market for trades. Barchart's comprehensive platform allows you to screen the market as easily as one, two, and three. Let me show you how:

You can access the screener by going to the Options section and selecting the Naked Put Screener.

The results page will list potential trades and different values in the headlines, including underlying security, expiration, bid prices, delta, and OTM probability.

Using a naked put strategy aims to generate income through the premium received from selling the put option. The current premiums are in the bid column. That's your maximum profit.

Probabilities are also very important when selling naked puts; OTM probability predicts the likelihood of a trade expiring out of the money.

Out-of-the-money means the strike price is lower than the current market price of the underlying asset. An option that expires out of the money will usually be unassigned- which is what you'll normally want. Conservative investors will often target a 70% or higher chance of the option expiring out of the money.

• OTM: Strike < Market Price
• OTM Probability: Chances the trade expires worthless
• Target 70%+ OTM Probability

You also have at-the-money and in-the-money put options. At-the-money means the strike price is equal to or very close to the current market price of the underlying asset, and the money means the strike price is higher than the current market price of the underlying asset.

• At-the-Money: Strike = Market
• In-the-Money: Strike > Market

The options Greek delta is another way to predict whether a put option will expire in or out of the money.

Delta measures how much an option's premium will change if the underlying asset's price moves by $1. For short puts, delta is expressed as 0 to 1. Conservative traders often prefer a delta of 0.30 or lower, which means an approximate 70% chance of the option expiring worthless. Lower risk, however, results in lower premiums.

• Delta: Premium change per $1 move
• Short puts delta: 0 to 1
• Conservative delta: greater than or equal to 0.30
• 70% chance expires worthless
• Lower risk = Lower premiums

You may also notice on the Barchart option chain that delta and OTM Probability have different values. This is because the values are calculated differently. However, OTM probability values are more accurate as they factor in additional variables to determine the value.

Now, if you'd like to screen for specific filters, The Set Filter tab allows you to customize your screens and utilize dozens of filters to tailor-fit your naked put searches. Use the search box to find a filter, or use the filter category drop-downs to find the data you want to screen for.

For example, you might screen for potential naked puts expiring between 30 and 45 days from now and have a 70%+ OTM.

In this case, we have a candidate: Tesla.

And with that, we have our trade details. Here's how you'll enter the trade:

If you choose this example, you will issue a sell-to-open order for Tesla at the $170 strike expiring July 19. You will receive $355 upfront for the $170 strike put on Tesla, expiring on July 19.

Let's see how this trade can go.

Exiting the Trade

Fast forward to the expiration date. Naked puts have three potential outcomes: they can either expire in the money (ITM) or at the money (ATM) or out of the money (OTM). Let's start with the latter.

Scenario 1: Put Option Expires Out of the Money

If Tesla's price ends at $195, the buyer has no incentive to exercise the option, which expires out of the money. You, the seller, keep the initial premium of $355, and the trade is closed.

• Tesla price: $195
• Option expires out of money
• Buyer doesn't exercise
• Seller keeps $355 premium
• Trade closed

For peace of mind, some traders close their OTM short options before expiration to avoid possible assignments. To close out your trade, you'll place a buy-to-close order using the same put option with the same underlying, expiration, and strike price. This will lead to slightly decreased profit, depending on the difference between your initial premium received and the premium you must pay to close the option.

• Close OTM options early
• Avoid possible assignments
• Place a buy-to-close order
• Same underlying, expiration, strike
• Results in slightly decreased profit

Scenario 2: Put Option Expires At of the Money

Say Tesla drops to exactly $170 - the strike. This option will likely expire worthless, and nothing further will happen.

Scenario 3: Put Option Expires In the Money and Gets Assigned

And finally, if Tesla goes to $150, the option will now be in the money. It'll get assigned, and you will buy 100 shares of TSLA for $170 per share. Assuming you don't intend to hold the shares, you can sell TSLA at market price.

• Tesla at $150: In the money
• Option assigned
• Buy 100 shares at $170
• Sell TSLA at market price

The maximum potential loss for a naked put occurs when the stock price reaches 0, but that's rather uncommon.

To calculate the loss on this trade, take your strike price and subtract Tesla's price at expiration. Then, subtract the initial premium received and multiply by 100 for every contract. The loss on this trade would amount to $1,645.

$170 - $150 - $3.55 = $16.45 x 100 = $1,645

However, if you choose to keep your Tesla shares, you will only incur paper losses and will now fully participate in the stock price movement, up or down.

However, since a naked put ultimately means owning 100 of the underlying security upon assignment, and the seller collects a premium, the risk of selling put options is less than owning the stock alone.

Breakeven & Profit/Loss Per Price Point

To calculate the breakeven price point of a naked put, subtract the premium received from the strike price. In this case, it is $166.45.

$170 - $3.55 = $ 166.45

To help you better understand how the trade can go, here's a table showing the profit/loss at different price points, assuming that you sell the shares upon assignment.

As you can see, any price movement higher than the strike price will not result in additional profit. But if the underlying stock moves below the breakeven point, you will incur paper losses.

Pros & Cons

Now, let's discuss the pros and cons of selling naked puts.

Selling naked puts can be an excellent way to generate income during neutral to rising markets. However, it is considered a high-risk strategy, as you can experience significant losses if the underlying asset's price drops. This is similar to owning the stock outright.

• Generates income in neutral to rising markets
• Significant losses if the underlying price drops
• Risks similar to owning the stock outright

Conclusion

Selling naked puts can provide traders with income from premiums, but the strategy often carries significant risks if not managed properly.

Successful traders have a risk management plan to handle adverse market movements, conduct thorough market analysis to support their bullish to neutral outlook, and monitor their positions to make informed decisions about exiting or adjusting the trade. Finally, they only sell put options on stocks they'd like to own, as you may get assigned.

Utilizing Barchart's Option Screener and supplementing your trading knowledge through the Barchart Options Learning Center can help ensure success in your options trading.