Do Not Start Selling Naked Puts on Micron. Tom Preston Says Do This Instead

SPX

The speaker discusses selling a naked short put on SPX with a strike price of 7395 and a call at 7565, which has a 48% probability of profit. However, the speaker notes that this trade is not recommended and highlights the potential for higher profit with a shorter time horizon. The trade is considered high risk due to the undefined risk associated with naked short puts.

P Sky

The speaker suggests selling a short put on P Sky, which is a low-priced stock, to capitalize on the potential for a bullish move. The max profit is $9, and the buying power requirement is $235. The speaker emphasizes that this is a defined risk trade with a clear maximum loss and a potential profit, but the trader must be comfortable with the risk involved.

P50

The speaker suggests selling a 9 put on P50 before its earnings report, expecting the stock to trade above the strike price. The trade has an 81% probability of making half its max profit and a 68% probability of expiring worthless. The speaker emphasizes that this is a trade idea for experienced traders, with a max loss of $235 for a $5,000 account.

Probability of Profit in Naked vs Defined Risk Strategies

Naked short put or strangle strategies often have a higher probability of profit compared to defined risk strategies like put spreads or iron condors. This is due to the potential for faster profit generation and the ability to capture more premium, although the risk is undefined. The probability can vary depending on the symbol's volatility and market conditions.

Defined Risk vs. Undefined Risk Trade Characteristics

Defined risk trades typically have lower max profit and lower probability of profit compared to undefined risk trades. The transition from undefined risk to defined risk trades often involves a trade-off where the potential reward decreases while the risk is more clearly defined. This is due to the structure of the trade, such as put spreads, which limit the maximum loss but also reduce the potential profit. The speaker emphasizes that the characteristics of these trades differ significantly, and the choice between them depends on the trader's risk tolerance and psychological comfort.

Starting with Low-Priced Stocks for New Traders

New traders should start with low-priced stocks when experimenting with undefined risk trades. This approach reduces the margin requirements and buying power needed, making it more accessible for smaller accounts. The speaker suggests that starting with such stocks helps build psychological resilience and familiarity with taking undefined risk on lower-risk products.

What is the advantage of selling naked puts instead of put spreads?

Selling naked puts can offer a higher probability of profit compared to put spreads, and the potential for faster profit generation. However, it involves undefined risk, which can be significant if the stock price drops substantially.

TakeawayNaked puts may provide higher profit potential but come with higher risk compared to defined risk strategies like put spreads.

How do you get used to taking large potential losses on short puts?

The speaker suggests starting with low-priced stocks to minimize the buying power requirements and margin needs. This allows traders to gradually build experience with undefined risk strategies without exposing themselves to large potential losses initially.

TakeawayStart with low-priced stocks to reduce margin requirements and build experience with undefined risk strategies.

What is the buying power requirement for a $9.73 stock?

The buying power requirement for a $9.73 stock is $235.

TakeawayTraders should be aware of the buying power requirements for low-priced stocks when considering options strategies.