Short Naked Put | Options Crash Course: Strategy Management

[Music] so welcome back to the options crash course strategy series we meet again my name is jim schultz in this video we are going to cover the short put which is actually a bit of a downtick in difficulty from the short strangle that we just did in the last video so that's pretty good we're gonna follow the same protocol that we've been doing winners losers in dance floor so let's begin with how a short put sets up all right so structurally strategically a short put is actually pretty straightforward first it's only a single leg so that's pretty nice but second we are almost always going to choose an out of the money strike on trade entry for a new position and the reason why is very simple by choosing an out of the money strike we leave ourselves room to be wrong directionally and still make money that alone is an extremely powerful phenomenon for example let's say you've got starbucks at a hundred dollars a share you want to sell a 95 put here's how a short put would set up if starbucks goes higher you're going to make money if starbucks goes nowhere you're going to make money but even if starbucks goes down a little bit but stays above that 95 strike you are still on the path to making money in a market that is very unpredictable and totally random in the 45 day time horizon this is very very advantageous all right so that's how a short put sets up now what about these winners well this is pretty straight forward because it's going to be the same as what we've seen with everything up to this point with vertical spreads and iron condors and diagonals and short strangles we want to target fifty percent of max profit so you sell the short put for two bucks you're looking to buy it back for a dollar you sell a short strangle or a short put for a dollar eighty you're looking to buy it back for 90 cents it's really that simple that's all there is to it okay so now on to these losers the not so fun guys this is where things can get a little bumpy so you might want to buckle up and of course this is not the only way that you could handle these situations but i do think it makes a little bit of sense first up as long as the stock is above your short strike as long as the stock is above your short put doing nothing is almost always the move to make it doesn't matter how you feel it doesn't matter what you think doing nothing is the move okay but let's say now the stock has fallen down to your short strike now what do you do well it really depends on the severity of the move right like if the stock is now just below your short strike then you probably only need to roll out in time right push this thing out to the next cycle add some duration pick up some extrinsic value widen out those breakeven points and you're probably going to be okay okay but what if the stock has fallen kind of significantly below your short strike now what do you do well first off as an initial line of defense you probably want to go ahead and roll out in time but also as a secondary line of defense you might want to consider adding a short call at the same strike as your short put this would create for yourself of course a short straddle and it's going to effectively serve the same purpose as rolling out in time you're going to pick up more extrinsic value you're going to help to widen out those breakeven points but there's another benefit adding those bearish deltas from the short call they will help to flatten out your directional risk flatten out your directional exposure from the deep in the money or somewhat in the money short put that you have and those bullish deltas this will allow you to focus more on non-directional elements like theta like vega and less on delta okay but what if what if the stock has fallen way below your short push strike now again first off roll out in time add that duration pick up the extrinsic value widen out those breakeven points but also adding a short call you probably don't want to go to the straddle strike now you might want to be a little bit more aggressive you might want to go right into an inverted strangle so your short call strike will be below your short put strike this will help to more aggressively neutralize those deltas while still bringing in credits adding extrinsic value and widening out those breakeven points the thing you want to be aware of here and you want to be careful of as we saw in the short strangle video is you just want to make sure that the width of your inversion is less than the total credits that you've collected so you're not locking in a loss for this cycle okay so now that you've made these adjustments how do you know when it's time to get out how do you know when it's time to exit a short put or any undefined risk strategy for that matter well here are some good rules of thumb if your position was a loser which is almost always going to be the case in this scenario if you can work that thing back to a scratch if you can work that thing back to even then i would strongly consider taking it off turning a loser into a scratch is basically like a winner at the end of the day but what if this thing never comes back what if the stock never cooperates the position never accommodates you and this thing just becomes a runaway train somewhere around 2x to 3x of total credits received is a good place to consider exiting your trade if you don't want to hold it anymore so just to be clear as an example let's say you sell a put for two dollars and then you make a couple of adjustments you add some time and your total credits collected become five dollars if you close that trade if it never comes back and you close it for fifteen dollars that is a 2x loser you collected five dollars and you lost 10 that's a 2x loser if you were to close it for 20 that would be a 15 loser or a 3x loser all right so those are the winners and those are the losers but what about the dance floor what about those in between guys when it comes to a short put well as is the case with all undefined risk strategies we don't want to carry these inside of 21 days to go so if you still have this on at 21 days to go the choice becomes simple you either roll it or you close it if ivr is elevated and you still like your bullish bias then consider rolling it if ivr has fallen and you don't like your bullish bias then consider closing it well what if ivr has fallen and you still like your bullish bias well that's your call alright guys you made it that is the end of the short put video be sure to save this video for a future reference and when you are ready i will see you in the next video short straddles we'll see you there

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Keywords: trade management, defending trades, winning trades, losing trades, profit/loss, rolling trades, bearish, bullish, options, trading, finance, market, volatility expansion, short strangle, undefined-risk strategies, positive theta, defending naked calls, defending naked puts, neutral trades, Dr. Jim Schultz, tastytrade, trade adjustments, naked options, stock substitution, long stock, buy stock, put options, trade income, selling puts for a living

Id: CF9DhvzVkbI

Length: 7min 12sec (432 seconds)

Published: Sat Feb 20 2021