Single (Naked) Option

The single or popularly know as the naked option, is a strategy consisting of buying one strike alone. It it known as “naked” because of the risk involved by it having no protection. This strategy is designed mainly as protection but is also used because of its unlimited reward aspect. It is an unlimited risk/unlimited reward strategy. All strategies consist of a combination of single options.

When you buy (debit) a single option, you are looking for the stock to exceed your strike price and continue moving. When you sell (credit) a single option, you are looking for the stock to NOT exceed your strike price and prefer for it to move further away from it. Lets take a look at some examples.

Debit Single (Naked) Option

Netflix is currently sitting at 624.06 (5/30/15). You believe the price can continue to move higher. You are looking at buying the 625 single call option. If the price continues to move beyond this strike price higher, the profit will continue to increase since there is unlimited reward. If you believe the price can move lower, you can look at the 622.5 single put option. If the price continues to move beyond this strike price lower, the profit will continue to increase since there is unlimited reward. 

Credit Single (Naked) Option

Netflix is currently sitting at 624.06 (5/30/15). You believe the price can continue to move higher. You can also sell the 625 single put option. The profit will be limited to the credit. If you believe the price can move lower, you can also sell the 625 single call option. The profit will be limited to the credit. Selling the single option has unlimited risk for if the stock does move beyond the strike being sold, the potential loss can be unlimited.

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