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What's The Difference Between Cash Covered And Naked Puts? - YouTube

Channel: unknown

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And what I want to talk about right

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now is the difference between cash

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secured puts and naked

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puts. If you have been following

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Сoffee with Markus, then you know

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that recently there was a comment

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from somebody who said,

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"It is the same." And of course,

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that is not the case.

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So in this video, I'll

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show you the differences of cash

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secured versus naked puts

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and also explain why I highly

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recommend that you trade cash

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secured puts when trading

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the Wheel strategy.

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So the Wheel strategy is a strategy

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with a very high winning

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percentage. See, in my previous

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video I explained what

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high winning percentage while I've

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been trading this strategy for the

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past three months publicly here

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on YouTube, and I haven't

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had a single losing trade

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yet. Now, today, I don't want to

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talk about the strategy here because

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I want to talk about the differences

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between cash secured and naked puts.

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But if you would like to see the

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strategy in detail, just watch

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my previous video, I'll link to

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it in the description.

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Anyhow, so as you can see,

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part of this strategy here is

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an overview of the strategy,

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part of it is that

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you sell a put option.

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So when you sell a put option, it

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means that you have to buy

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the stock at the strike

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price that you sold it for.

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So this is very important and you

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have to do it.

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So therefore, obviously

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what you want is that the stock

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stays above the

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strike price that you chose.

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Because in this case,

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you just keep the premium.

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Now, let me give you a very,

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very specific example here.

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So a few days ago,

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I sold the 115

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put on IBM that expires today.

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So as you can see, I did this

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three days ago and I received

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a premium of

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$43 per option that I traded.

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Now, I traded two options,

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I traded two contracts.

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So this means that I received

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$86 in premium.

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And if you divide this by

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three days, so this means that we

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are looking at approximately

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$29 per day in

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premium, which is what I'm looking

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for. I mean, this is how I have

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achieved the results.

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The very systematic results here

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22.7% over the last three months,

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which would, if I can keep it up,

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would translate into

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19.8% per year, anyhow.

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So thus far, what

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does it have to do with cash secured

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or naked puts here?

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Again, in this example, as long as

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IBM stays above 115

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until expiration, which is

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in 20 minutes from

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now. So it has to stay above 115

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over the next 20 minutes.

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So in this case, I

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would just keep the

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$86 in premium and the option

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expires worthless.

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However, if IBM

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would be below 115

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at expiration, then I have

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to buy 100 shares

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of IBM at a price

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of $115.

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So in my case, since

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I have sold two options,

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I would have to buy 200 shares

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of IBM at

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$115. So this means that I

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would have to bring $23,000

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to the table.

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But here's the deal.

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In order to sell these

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puts, my broker

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only required around

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$4,400. Let's take a look at this.

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See IBM here, it says capital

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required

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$4,453. That's only 20%

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of the money that I actually need to

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buy the shares. So now,

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now let's talk about the difference

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between cash secured puts

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and nakad puts. Is this making sense

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thus far? If it is, do me a favor

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and click on like really quick,

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because this way I know that

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I'm not going too fast.

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So cash secured puts means

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that you have

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$23,000 in your account

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to cover for

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the stocks, if you are getting

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assigned, right?

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So if you only had

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$5,000 in your account, you

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could still place the trade because

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as you can see, the broker only

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required $4,453.

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But you wouldn't

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have enough money to actually

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buy the shares if

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you got assigned.

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So this means

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that you sold the naked puts.

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You just don't have enough

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money. You just had enough money for

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the broker, what he required

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to sell it. So why would

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the broker let me sell

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the puts

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for only $4,400, but then in

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fact, I need

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$23,000 to buy the shares if I get

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assigned?

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Well, here is why the broker does

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it. He does it for two reasons.

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Reason number one, most

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options expire worthless.

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And reason number two, even if they

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don't expire worthless

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most traders buy the

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option back, so they close it before

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they expire and the broker knows

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that. That's why he's only

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requesting a fifth of

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the buying power that you need

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for buying the shares.

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And that's all good as

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long as you close your position

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before expiration.

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However, when trading the Wheel,

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you actually want

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to get assigned.

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It is part of the strategy.

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You see, we not only sell a put

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option, if we do get

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assigned we will sell calls

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and get the premium, part of the

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strategy. Again, if you would like

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to have more information on the

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strategy I'll link to it in the

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description here.

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So the question now is what

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happens if you don't

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have enough money and

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you're getting assigned?

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Well, let's say you have

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$5,000 in your account and you

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entered this trade, and now

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IBM is below 115

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at expiration and you have

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to buy 200 shares at

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$115. But you don't have

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the money.

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So what happens?

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Well, now your broker

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is buying them

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anyhow for you

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and you get a

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so-called margin

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call. What does it mean?

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Well, a margin call basically means

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the broker asks you

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to wire the remaining

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$19,000 that you need for this into

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the account.

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And he wants to have this pretty

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much today.

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Now, what happens if you don't have

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the money? So if you if you don't do

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this, well, the broker will

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sell the shares and he

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sells them the next day at whatever

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price he can get.

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So this means that you lose

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all control over this trade.

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Your broker is now in control

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and that's not good.

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You see, when trading the Wheel

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strategy, you want to remain in

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control because after we get

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assigned the shares, let me just

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show you the strategy again.

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It's part of the strategy after you

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get assigned shares we want to sell

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calls against it and collect even

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more premium.

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And that's why I highly

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recommend that you trade cash

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secured puts so that you

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have enough money in the account in

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case you get assigned.

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Because this way you

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have full control over your shares

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and you can actually make money

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with them.

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Anyhow, is this helpful?

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Because now you know the difference

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between cash secured puts and

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naked puts and you know when

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to use what.

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Is this helpful at all?

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Now, if you enjoyed this video do

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me a favor, click on like so that

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What&#39;s The Difference Between Cash Covered And Naked Puts? - YouTube

What's The Difference Between Cash Covered And Naked Puts? - YouTube