Stock Option Return - Naked Put Return

Naked Put Return

The naked put is a neutral-to-bullish strategy and consists of selling a put option against a stock. The naked put profit/loss profile is similar to the covered call (see above) profit/loss profile. The naked put generally requires less in brokerage fees and commissions than the covered call. The following return calculation assumes the sold put option is out-of-the-money and the price of the stock at expiration is greater than the put strike price at option expiration:

Naked Put Potential Return = (put option price) / (stock strike price - put option price)

For example, for a put option sold for $2 with a strike price of $50 against stock LMN the potential return for the naked put would be:

Naked Put Potential Return = 2/(50.0-2)= 4.2%

The break-even point is the stock strike price minus the put option price.

Break-even = $50 – $2.00 = $48.00

As long as the price of the LMN stock is greater than $48 at stock option expiration, the position will be profitable. Below a LMN stock price of $48, the position is unprofitable.