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I'm going to wrap up our two week tutorial session about options. We've discussed what they are, how they work, ways to use them, etc. Today we're going to end with one of the riskier aspects of options trading, called "selling naked". While it is indeed more risky, meaning you have to really manage that risk, along with the risk comes big rewards. So, let's get to it...
As you know if you think a stock is going to rise you can buy a call option and if you are right your call option will appreciate in value. On the other hand, if you think a stock is going to fall you can buy a put on it and sure enough if you are correct and the stock falls your put increases in value and you have made a profit. That being said ... there are other ways to play this option game and in this section we are going to look at one of them. As a technical term it is called "selling a naked put" and although the name sounds a bit kinky...believe me that is the true name. The first thing to keep in mind as we go forward is that this technique is very profitable if done correctly and any time the market is going to reward you with higher profit's...instantly you should think higher risk.
What's a Put???
Because of an increased interest in “stock options” lately, we’ve been doing a bit of an introduction to options recently. On Sunday we explored the idea of what they are and how they function. We discussed the fact that options are no more risky than stocks, and how you shouldn’t be afraid of them at all. They’re simply another tool to use in trading. Then we talked about the basic “call” option.
Today we’re going to look at the other side of the coin, which is called a “put” option.