The Naked Put (Part I)

In the quest for consistent trading profits, I have turned to option income trading:  the establishment of a positive theta position.  Theta is an “option greek” that describes what will happen to your P/L as each day passes.  When you establish a positive theta position, you can expect to make daily money from time decay.

In theory, this is best understood by assuming no change in stock price from now until expiration.  On March 19, AAPL stock closed at $601.10.  I can sell an April 510 put for about $2.40.  If AAPL remains at $601 then with the passage of each day, I stand to make about $14.  When the option expires worthless in 33 days, the entire $240 will be mine.

Of course, no free lunch exists with option trading [or anything else?].  In exchange for the $14/day, I have taken on the obligation to buy 100 shares of AAPL for $510/share (the “strike price”) on or before April 21.  As long as AAPL remains above the strike price, nobody in their right mind would have me buy their shares for $510 each because they could sell on the open market for a higher price.  This is why the 510 put would expire worthless.

As with all aspects of trading and investing, option income trading is paired with risk.  In future posts, I’ll talk more about this risk, volatility, and different aspects of option trading that I am fanatical about.