Uncovered Put Write

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An Uncovered Put Write, also called a naked put write, sells a put without a protective long put. The premium is the maximum profit; the seller must be able to fund an assignment.

Limited profits with no upside risk

Profit for the Uncovered Put Write is limited to the premiums received for the options sold and unlike the Covered Put write, since the uncovered put writer is not short on the underlying stock, he does not have to bear any loss should the price of the security go up at expiration. The naked put writer sells slightly out-of-the-money puts month after month, collecting premiums as long as the stock price of the underlying remains above the put strike price at expiration.

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Loss potential

While the premium collected can cushion a slight drop in stock price, loss resulting from a catastrophic drop in stock price of the underlying can be huge when implementing the Uncovered Put Write strategy.

Breakeven Point(s)

Example

Suppose XYZ stock is trading at $45 in June. An options trader writes an uncovered JUL 45 put for $200.

If XYZ stock rallies to $50 on expiration, the JUL 45 put expires worthless and the trader gets to keep the $200 in premium as profit. This is also his maximum profit and is achieved as long as XYZ stock trades above $45 on options expiration date.

If instead XYZ stock drops to $40 on expiration, then the JUL 45 put expires in the money with $500 in intrinsic value. The JUL 45 put needs to be bought back for $500 and subtracting the initial credit of $200 taken, the resulting net loss is $300.

These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.

Commissions

For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.

For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.

Similar Strategies

The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.

Stock Repair Strategy

In-The-Money Covered Call

Covered Straddle

Writing Naked Puts to Purchase Stocks

The biggest risk facing the uncovered put writer is that should the price of the underlying drops below the put strike price, he is forced to buy the shares at the put strike price. However, for a long-term investor looking to go long on the stock at a discount, writing naked puts can be a great way to buy stock. He can do that by writing uncovered puts with a strike price at or near his target entry price. If the stock price drops below the put strike and the puts gets assigned, he gets to make the stock purchase at the desired price.

Additionally, he gets a further discount in the form of the premium earned from selling the puts. Even if the put strike price was not reached and the stock not acquired, he still gets to keep the premiums!

Before expiration and assignment

The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.