options - Buying puts without owning underlying - Personal Finance & Money Stack Exchange

Put options are bets that the price of the underlying asset is going to fall. When you buy and sell puts, it pays to know the difference between a naked or covered put option. Buying a put option without owning the stock is called buying a naked put.

Naked puts give you the potential for profit if the underlying stock falls. You can also use puts to protect against short-term volatility in long-term holdings.

In the first instance, your put option acts as an insurance policy to protect your gains. In the second instance, if your put goes up in value, you can sell it and decrease the paper losses on your stock.

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Selling naked put options is similar to buying a call option, because you make money when the underlying stock goes up in price. If the stock falls in a big way, and you get assigned, you can face big losses from having to buy the stock in the open market to sell it to the party exercising the put you sold.

You need to put up collateral to write naked puts, usually in an amount that is equal to 20 percent of the current stock price plus the put premium minus any out-of-the-money amount.

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