Short a naked 50 put strike with the underlying currently trading at 55 receiving a .25 credit?

Question

Short a naked 50 put strike with the underlying currently trading at 55 receiving a .25 credit. What are the risks, requirements, max gain and max loss?

Answer 1

That doesn't sound like a great deal. $25? Could be a lot of risk for small potential gain. What stock  and expiration date? Need more info to evaluate.

Answer 2

Assuming no commission, your max gain is  $25  for each contract you shorted.

If the underlying security is above $50 on expiration day ( the 3rd Friday of each month ), then you make that profit.

Of course, you can cover your short at any time for a profit or loss along the way.

You maximum loss is $4975 per contract shorted.  That assumes the stock goes to zero, and you have to buy it at $50, the strike price.

But you get a consolation prize of the $25, that why the loss is less than $5000.

If your put is a June put, you have 3 weeks to sweat it off.  The 10% premium right now seems OK, but all you need is just one whiff of bad news, and the stock can drop 15% just like that.

Look at Bear Stearns.

Answer 3

I am ignoring transaction costs an assuming the underlying is a stock.

Requirements:

A margin account authorized to write naked puts and approximately $1,250 margin available. (Some brokers may require more margin.)

Max gain:

$25 if the stock is over $50 at expiration.

Max loss:

$4,975 if the stock is $0 at expiration.

Risks:

Losing money if the stock is under $49.75 at expiration.