A naked option is when the investor does not have any other position in the security in either cash, futures or options.
Naked options positions are for those investor who have a high risk appetite and are very sure about the direction of the market.
When to use this strategy?
This strategy is used when the investor is highly bearish on the underlying security.
How to build this strategy?
This strategy has only one leg:
Leg 1 – Buy 1 ITM/ATM/OTM Put option
Credit Spread/Debit Spread
This is a Debit Spread Strategy.
This strategy has unlimited profit potential.
When is this strategy profitable?
The investor stands to make unlimited profits if the price of the underlying security falls sharply below the strike price of the put option.
The investor faces limited risk in this strategy.
When is this strategy unprofitable?
The investor faces losses if the price of the underlying security is above the strike price of the put option.