Options are the hedging tool of the stock market, they should be used for the hedging purpose. If used otherwise they may cause huge losses as they have potential to give you unlimited losses. Option selling can be your friend and enemy at the same time, selling of options can give you profits but it is very risky too. In order to understand it completely let us ask some questions and try to answer them.
What is selling naked call or what is selling naked put option
When you simply sell a call option without having that stock that is known as the selling of the naked call option and selling of the put option without having the cash equivalent to the one lot of the stock is known as the naked put option.
How is naked call or naked put option a risky way of trading
Think of a situation in which you sell a call option of out of the money strike for a stock. Now the price of that stock increases and crosses your strike price and making it in the money. From my experience I have witnessed that stocks are capable of moving in one direction. If such a situation arises the value of the call that one has sold will increase and hence will cause the loss to the seller. On expiry the seller has to either square off his position as he is not having the stocks for the physical settlement.
How About the profits in Naked call and naked put
Selling the naked call and naked put are actually most profitable way from the option selling if the things go with your planning, but if things turns out to be against you you may incur huge loss. If you have sold a naked call and the market moves downwards then the premiums will decay and even the option may expire out of the money and could give you the complete premium as profit.
Have I ever sold Naked call or naked put
I used to sell the naked call and naked put when I had the budget of around 1 lakh. I even made the profits from it but once the market jumped too much and I lost a huge amount in that as well , since then I worked to build a portfolio and decided to not go with the naked options.
What is the alternative of naked call or naked put options
It could be better to build a portfolio and hedge it with the options, covered call or cash based put, this way one will be hedged and may earn some decent profits as well.
Most important thing in trading is to protect your capital while making small or big profits. One will always get alot of opportunities to get a decent return all he have to do is wait for the right moment , stay invested and hedge properly.
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