An Investment Strategy that Helped the World’s Richest Man


An Investment Strategy that Helped the World’s Richest Man

A volatile market requires a bit of ingenuity. Naked puts arose because of the need for traders to make gains over a short period of time without having to overthink risk. By definition, naked puts are insurance against traded positions usually provided by a third party. These are vital for individuals who may speculate a fall in share prices and would like to sell, or those that are looking for some kind of buffer on account of the fact that they are holding a large number of shares that they would hate to lose in the event of a financial catastrophe.

Naked puts usually help individuals profit when share or commodity prices are going down. This may seem counter-intuitive, since a lot of traders usually think that you should only buy high and sell low. Naked puts are ideal for high quality shares that you don’t mind having even when prices go down. This kind of thinking allows people make profits on weak shares as well as buy into stronger ones.

Key Points on Puts

  • Only write naked puts on quality stocks that have shown promise with regard to profits over the last couple of years.
  • Look for puts that have spreads that are $0.25 or lower since this will protect your investment should things start going south very fast.
  • Strike during uncertain times; this is because a lot of people will be dumping shares that may actually turn out to be profitable after the storm has passed
  • Pay attention to the 200-day moving average price for the stock you’d like to buy into, and make sure that it hasn’t dipped below this price.
  • Only trade over short time periods so you’re able to strike like a scalper which in effect limits your loss. Timing here is everything.
  • Have a stop-loss strategy, especially in a volatile market. Prudence also requires you to trade small volumes so you don’t make losses that are so big that you may have a problem bouncing back from later.

In order to trade naked options, you must borrow money from your broker. This money is also known as margin and is something that essentially reduces your risk since you’re not using your own money.

As mentioned earlier, investors who place money on naked puts usually don’t go at a loss even if the price of a certain stock improves after their put action because they will make money from the premiums that they will collect when worthless options expire. To put the whole naked put phenomenon in easy-to-understand terminology, you as a trader should always write calls when prices are moving down, and write sells when prices are going down. It is this opposite movement compared to what everyone else is doing that will bring in a profit every time.

Lastly, don’t forget to keep a level head at all times and do your homework into the different stocks you’d like to call before moving ahead since this will provide you with the facts you need to make informed decisions.