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Selling naked puts is a powerful strategy that can help you increase your return in the stock market. But is it a safe strategy? Aren’t stock options very risky after all?

Well when you buy stock options you are betting the stock will make a large move fast. But when you sell puts the right way you actually take less of a risk then you would be if you had a simply bought the stock. How can this be?

Let’s look at this strategy. When you sell a put you are giving someone else the right to buy a stock at a certain strike price. You do walk away with a nice option premium to take on this risk.

So say you sold the $45 put option on a stock , let’s call it stock XYZ, you would walk away with a nice premium and only be obligated to buy it if it closes below $45 by the time the option ends up expiring.

So if this stock closes at $50 or even $45.01 you are not going to be obligated to buy the stock. Instead you are simply going to be able to walk away with the premium that you sold. It is free money!

Now what happens if the stock goes below this level. If the stock closes at $35 then you will be obligated to buy it at $45 taking a huge loss.

In fact the trade could possibly lose up to $45. So potentially it could mean that you lose a large sum of money. So why do I still love to sell puts? The strategy can work extremely well provided two things.

1. You do not mind getting into the security

I would never sell a put on a stock that I would not love to own. In other words if I would love to hold onto the stock for the long term I might consider selling a put on it instead.

This way even if I do get called out the only thing that happened was that I got into a position that I wanted to get into anyways. I also did much better than if I were to simply buy the stock because I would get money up front.

2. You Can Afford to Buy the stock

Obviously if you can’t afford to buy the stock you are taking a large risk. What if the stock goes down to $30 or even lower? You would simply have to take the loss possibly even wiping your account out.

I love this strategy, especially when I sell options on dividend paying stocks which have great fundamentals. It isn’t for everyone but I love it because it gives be a win or win situation. I either walk away with the premium from the option, or I get into a great stock which I do not mind owning for a little while.

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