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Selling Naked Puts with Near Term Expiration

|Includes:Bank of America Corporation (BAC), CSCO, FAS

With five days until expiration we used the Expert Option Search to find short term naked put trades with the goal of earning option income without assignment.

Before we continue let us review some terms used in the Expert Option Search.

  • Downside Protection: DSP is defined as how far a stock would have to fall before the option position was underwater.
  • Return on Investment: ROI is the expected return based on the monies invested in the covered call or naked put trade.
  • Probability of Assignment: POA represents the likelihood that an option seller will be assigned the stock (or have the stock called away) when the option expires. The goal with short term naked put trade as discussed here is to sell options that will expire worthless so the lower the POA the better.
  • Out of The Money: OTM is a common term that means how far the strike price is away from the stock price.

The settings we used for this search were Option Expiration Date of 11/12/2010, stock price of $1 to $50 a share, and a return of investment (NYSE:ROI) of at least 1%. 

 It may seem that looking for a 1% gain is low but consider we are attempting to gain 1% on monies invested for 5 trading days. 

The results of the search provided some interesting prospects. We will review these by the highest to lowest ROI.

1. Direxion Financial Bull 3X Shares (NYSEARCA:FAS):  The 25 strike has a potential return of 1.60% for 5 days. It is 5.59% out of the money with 7.10% downside protection, and has a POA of 26%.  The ETF shot up 5.58% on Friday.  The ETF would have to drop more than 7.10% for the position to be underwater. Since this is a 3X ETF it is possible.  This candidate is interesting but risk of assignment even with a low POA can happen on a 3X ETF so we pass.

2. CISCO (NASDAQ:CSCO):  The 24 strike is 1.07% OTM with 2.51% DSP 2.51%.  The POA on CSCO is 41%.  This is a good candidate if you want to own CSCO below the market price on Friday. The option is not far OTM and assignment may happen by Friday. If you like CSCO at these levels and want to buy the stock under the market price this trade would be appealing.

3. Bank of America (NYSE:BAC):  The 12 strike is 2.91% OTM with a 29% POA. Based on the recent market action it may pull back to the 12 strike but that is also at support.

Typically this strategy can play out well when stocks are in an uptrend, sideways pattern, and 5 to 10 days out on expiration.  It is best to look for stocks with lower volatility this will reduce the ROI but the point is to sell naked puts that will expire worthless and take little risk. 


Stocks: BAC, CSCO, FAS