Option Strategies

Naked Put

Introduction

A Naked Put, also known as an uncovered put, consists of selling put Options without having a corresponding short position in the underlying security. It's called "naked" because you don't have any cover or protection in the form of a short position in the underlying asset, which exposes you to potentially unlimited risk. Naked puts aim to profit from the Option premium by selling puts. At any time for American Options or at expiration for European Options, if the stock moves above the strike price, you keep the premium. If the underlying price moves below the strike, the Option buyer can exercise the Options contract, which means you need sell the underlying at market price to fulfill your obligation to buy it at the strike price and keep the premium.

Implementation

Follow these steps to implement the naked put strategy:

  1. In the Initializeinitialize method, set the start date, end date, starting cash, and Options universe.
  2. private Symbol _symbol;
    
    public override void Initialize()
    {
        SetStartDate(2014, 1, 1);
        SetEndDate(2014, 3, 1);
        SetCash(100000);
    
        UniverseSettings.Asynchronous = true;
        var option = AddOption("IBM");
        _symbol = option.Symbol;
        option.SetFilter(universe => universe.IncludeWeeklys().SinglePut(30, 0));
    }
    def initialize(self) -> None:
        self.set_start_date(2014, 1, 1)
        self.set_end_date(2014, 3, 1)
        self.set_cash(100000)
    
        self.universe_settings.asynchronous = True
        option = self.add_option("IBM")
        self._symbol = option.symbol
        option.set_filter(lambda universe: universe.include_weeklys().single_put(30, 0))

    The SinglePutsingle_put filter narrows the universe down to just the one contract you need to form a naked put.

  3. In the OnDataon_data method, select the Option contract.
  4. public override void OnData(Slice slice)
    {
        if (Portfolio.Invested ||
            !slice.OptionChains.TryGetValue(_symbol, out var chain)) return;
    
        // Find ATM put with the farthest expiry
        var expiry = chain.Max(x => x.Expiry);
        var atmPut = chain
            .Where(x => x.Right == OptionRight.Put && x.Expiry == expiry)
            .OrderBy(x => Math.Abs(x.Strike - chain.Underlying.Price))
            .FirstOrDefault();
    def on_data(self, slice: Slice) -> None:
        if self.portfolio.invested:
            return
    
        chain = slice.option_chains.get(self._symbol)
        if not chain:
            return
    
        # Find ATM put with the farthest expiry
        expiry = max([x.expiry for x in chain])
        put_contracts = sorted([x for x in chain
            if x.right == OptionRight.PUT and x.expiry == expiry],
            key=lambda x: abs(chain.underlying.price - x.strike))
    
        if not put_contracts:
            return
    
        atm_put = put_contracts[0]
  5. In the OnDataon_data method, place the orders.
  6. Approach A: Call the OptionStrategies.NakedPutOptionStrategies.naked_put method with the details of each leg and then pass the result to the Buybuy method.

    var nakedPut = OptionStrategies.NakedPut(_symbol, atmPut.Strike, expiry);
    Buy(nakedPut, 1);
    naked_put = OptionStrategies.naked_put(self._symbol, atm_put.strike, expiry)
    self.buy(naked_put, 1)

    Approach B: Call the Market Ordermarket_order or Limit Orderlimit_order method.

    MarketOrder(atmPut.Symbol, -1);
    self.market_order(atm_put.symbol, -1)

Strategy Payoff

The payoff of the strategy is

$$ \begin{array}{rcll} P^{K}_T & = & (K - S_T)^{+}\\ P_T & = & (P^{K}_0 - P^{K}_T)\times m - fee \end{array} $$ $$ \begin{array}{rcll} \textrm{where} & P^{K}_T & = & \textrm{Put value at time T}\\ & S_T & = & \textrm{Underlying asset price at time T}\\ & K & = & \textrm{Put strike price}\\ & P_T & = & \textrm{Payout total at time T}\\ & P^{K}_0 & = & \textrm{Put price when the trade opened (credit received)}\\ & m & = & \textrm{Contract multiplier}\\ & T & = & \textrm{Time of expiration} \end{array} $$

The following chart shows the payoff at expiration:

Strategy payoff decomposition and analysis of naked put

The maximum profit is $P^{K}_0$, which occurs when the underlying price is at or above the strike price of the put at expiration.

The maximum loss is $K - P^{K}_0$, which ocurrs when the underlying price drops to zero.

If the Option is American Option, there is a risk of early assignment on the contract you sell.

Example

The following table shows the price details of the assets in the algorithm:

AssetPrice ($)Strike ($)
Put1.37185.00
Underlying Equity at expiration190.01-

Therefore, the payoff is

$$ \begin{array}{rcll} P^{K}_T & = & (K - S_T)^{+}\\ & = & (185 - 190.01)^{+}\\ & = & 0.0\\ P_T & = & (P^{K}_0 - P^{K}_T)\times m - fee\\ & = & (1.37 - 0.0)\times m - fee\\ & = & 1.37 \times 100 - 1\\ & = & 136 \end{array} $$

So, the strategy gains $136.

The following algorithm implements a naked put strategy:

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