Why do they say selling a naked puts can have unlimited potential loss?
(@Kevin) Whenever you sell an option naked, you risk having to buy it back to close at “unlimited” loss because it’s possible that the option appreciates in value a great ton by the time that you have to close it. For selling puts, a common strategy is selling cash secured puts. Which means you have to buy 100 of the other person’s shares at the strike price of your put, per put. Another way to secure your position is with a spread. So for example you could Buy To Open the 06/16 AAPL 165p, while selling 06/16 AAPL 160p. Your short leg is hedged by your long leg.
3 Likes