Naked Put (Uncovered / Short Put)

What it is

A naked put (also called an uncovered or short put) is an options strategy in which an investor sells put options without holding any offsetting position in the underlying security. The seller receives the option premium and is obligated to buy the underlying at the option’s strike price if the put is exercised.

Key takeaways

Seller collects premium and benefits if the underlying rises or remains above the strike by expiration.
Maximum profit is the premium received (limited).
Breakeven for the seller = strike price − premium received.
Maximum theoretical loss occurs if the underlying falls to zero and equals (strike − premium) per share.
Assignment can occur any time before expiration, creating an obligation to purchase the underlying.

How the strategy works

Sell a put option on an underlying security without holding a short or long position that offsets the obligation.
If the underlying stays above the strike at expiration, the put expires worthless and the seller keeps the premium.
If the underlying falls below the strike, the put buyer may exercise the option. The seller must buy the underlying at the strike price, potentially resulting in a loss equal to (strike − market price) minus the premium received.
Sellers who are comfortable owning the stock at the effective cost basis (strike − premium) often use this strategy on stocks they view favorably.

Example

Strike = $60, premium received = $2.
If underlying closes at $55 and the put is exercised:
Gross loss = $60 − $55 = $5 per share.
Net loss after premium = $5 − $2 = $3 per share.
If the underlying finishes at or above $60, seller keeps the $2 premium (maximum profit).

Naked Put vs. Covered Put

Naked put: no offsetting position; seller can be assigned and must buy the underlying at the strike.
Covered put: seller maintains a short position in the underlying equal to the put contracts sold. Covered puts behave differently because the seller already holds a short underlying exposure; the strategy is effectively bearish to neutral.

Risks and practical considerations

Limited upside: profit is capped at the premium received.
Downside risk: theoretically substantial — if the underlying falls to zero, the loss equals strike − premium per share.
Margin: brokers typically require significant margin because of assignment risk and potentially large losses.
Assignment timing: option buyers can exercise before expiration; sellers must be prepared to take delivery.
Risk management: many sellers close positions before large declines, use stop-loss rules, or sell puts only on stocks they are willing to own at the net cost basis.
Suitability: best for experienced options traders who are bullish to neutral on the underlying and are prepared for the possibility of being assigned.

When investors use naked puts

To generate income from premium when moderately bullish or neutral about a stock.
To acquire a preferred stock at an effective purchase price equal to (strike − premium).
As an alternative to placing a limit order to buy stock: if assigned, purchase occurs at the strike (less premium), potentially below current market price.

Summary

A naked put is an income-oriented, bullish-to-neutral options trade that can be profitable if the underlying stays above the strike. It offers limited reward (the premium) and potentially large downside, so it requires careful risk management, sufficient margin capacity, and willingness to own the underlying at the net cost basis.