A naked put is a powerful strategy to both generate income and potentially purchase a stock at a lower price than the current market value.
Today, we’re continuing our series focusing on tracking options within TradeStops. Last week, we looked at tracking covered calls. Last week, we looked at the basics of tracking options in TradeStops.
In the naked put trade, a put is sold at a strike price below where the stock is currently trading. For many people, the goal is to buy a stock they like at a lower price and, at the same time, generate a high level of income while waiting for the stock to move lower.
Let’s look at how the naked put trade is set up. For this example, we’ll again use Apple Inc (AAPL). The closing price of the stock as of 3/31/2017 was $143.66. AAPL has performed quite nicely since triggering a Stock State Indicator (SSI) Entry signal on 8/8/2016.
But what if you don’t want to pay the current market price on AAPL? What if you decide that you would be willing to buy the stock at $135? Selling a naked put is the way to do this.
For this example, let’s assume that you want to sell one put that has a strike price of $135 and expires on 5/19/2017. One contract equals 100 shares of the underlying stock, in this case AAPL. This is how the trade would be entered in TradeStops. Don’t forget that this is a “short” trade.
And here’s how the position shows up in your TradeStops account.
The “Status” column is empty because there is no alert currently set up. Let’s change that now. Click on the “Alert” tab and then on the “Add Alert” box. We’re going to set up an “Option Cost Basis” alert.
Don’t forget to click on the “Add Alert” box.
This is set up so that you’ll be alerted if AAPL closes 17.34% below the Cost Basis. The cost basis is the option’s strike price minus the premium received. In this case, that’s $135.00 minus $1.39 so the cost basis for this position is $133.61.
Why was 17.34% used as the trigger? It’s because the Volatility Quotient (VQ) of AAPL is 17.34%. If you don’t want to take that much risk in the position, you can use a smaller number than the 17.34%.
This is how the alert shows up on your TradeStops page.
As always, we recommend that you create a couple of examples on your own so that you’ll be comfortable entering these trades in your actual investment accounts.
If you have any questions, please contact our Customer Success team.
Education Director, TradeStops