All about investment

by Shaun

Selling Naked puts and naked calls are two strategies that are hardly used in the stock market. And there is a reason for that, they are considered to be the 2 riskiest strategies of all.

What is the difference between the strategies and what makes them so risky? Well when you sell an option you are giving someone else the right to either make you buy or sell a stock at a given price on or before a given date.

For instance when you sell a naked call you have the obligation to sell a stock at a given price on or before expiration. So if you sell the $30 call option the buyer of that option can make you sell the stock at anytime during the lifetime of that option.

So if the stock goes up to $40, $50, or even $100 you will be forced to sell it at $30. Of course this has the potential of giving you a very big loss. Your potential loss is actually unlimited. That is why I never ever even think about entering a naked call.

A Naked Put on the other had can be less risky. If you sell a $30 put you have the obligation to buy the stock at $30, which means that the most you can possibly lose is $30, not unlimited.

If the stock is a very strong company that you would not mind holding onto for a long time then there can actually be less risk in selling a put then there is in buying the stock, because you get paid to buy it.

So while naked calls are too risky to touch (at least for me) naked puts can definitely be a great strategy if you use it right.

For more on selling naked puts visit http://www.stocks-simplified.com/selling_puts.html

For more on stock trading visit http://www.stocks-simplified.com

About the Author

When I was young I wanted to learn how to trade the stock market. So I traveled around the country listening to professional traders talk about how they are making money in the market. Now I understand how easy it is to make money in the stock market and started a site http://www.stocks-simplified.com to help others learn.