A Naked Put is considered to be an income strategy that involves creating or writing a put contract. The strategy is a bullish strategy that requires level 4 options approval from your broker. This is the same level required to do a credit spread.
When you sell a naked put, you sell someone a right. That right gives someone the right to sell the stock to you or “put” the stock to you at the strike price by the expiration date. This means that you have an obligation. You agree that you are willing to buy the underlying stock at the strike price. You agree to buy 100 shares of the stock (or 10 if you sold a min contract) for each contract that you sold. This requires that you have enough money in your account to be able to buy the shares of stock that potentially could be “put” to you.
When you sell this right, you receive the option premium which is income put into your account. Since you may end up buying the stock, you would only want to use this strategy for stocks that you are bullish on – that you wouldn’t mind buying – stocks that you would like to buy and be willing to buy at the strike price that you specified.
For a detailed example of a naked put, you can look to the Stock portion of the Success Center. Go to the E-Library and scroll down to Plan New Trades and launch the Naked Put example.
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