What is uncovered?

Uncovered puts are situations in which the option on the option does not have a short position that would accompany Put. Sometimes referred to as naked, the position on the option may also include situations where the same amount of cash stored to cover PUT is not. Any of these two scenarios results in a higher degree of risk for the investor, including a higher degree of liability if PUT does not work as expected.

While Nakeds with a short option is a relatively common approach used by a number of investors, there are several points to remember. First, the exposed put has no potential for rewards associated with other strategies. In fact, the uncovered PUT often has a very limited reward potential, which is usually associated with the premium collection.

Secondly, the uncovered Put has a built -in degree of risk that could far beyond potential rewards. This is especially the rendition of the shares associated with the exposed put passes through the value of the descending spiral. This may result inPut assignment, which will leave the investor with a large amount of debt to cover.

However, even if the price of the shares and the exposed put is applied, it does not automatically mean that the investor will suffer a net loss. If the stock price falls below the strike, there is a great chance that puts will be assigned. This will involve the investor to pay for stocks at a higher price of strike. Although it looks like a loss on the queue, there is a great chance that the amount of premium on the exposed PUT will equalize the difference and still leave a small amount of net profit for the investor.