Naked Put
A naked put is selling a put without setting cash aside to buy the shares. Learn why 'naked' means unbacked, what the real risk is, and the safer version to use instead.
A naked put is selling a put option without setting aside the cash to buy the shares if you get assigned. The word "naked" means the position is uncovered, unbacked, exposed. You have made a promise to buy stock, but you have not parked the money to keep it.
It is the same trade as a short put, with one dangerous difference: nothing is backing it. Let me show you why that matters.
What "Naked" Means
In options, naked means an obligation with no backing behind it. The opposite is "covered" or "secured," where you have the asset or the cash ready to meet the obligation.
Sell a put and set aside the full cash to buy the shares, and you have a cash-secured put: backed, calm, prudent. Sell that same put on margin with the cash not set aside, and you have a naked put: unbacked and exposed. Same mechanics, very different safety.
Where the Danger Lives
The trade looks identical to a cash-secured put right up until the stock falls. Then the difference becomes painful.
Say you sold a $190 put on Apple and collected $400, but you did not park the $19,000. Apple then drops to $160 on bad news. You are obligated to buy 100 shares at $190, a $19,000 purchase, while they are worth only $16,000. That is a $3,000 loss on paper, softened only by the $400 you collected.
Worse, because you never set the cash aside, your broker may hit you with a margin call, demanding funds immediately or closing the position at the worst possible moment. The maximum loss on a naked put runs all the way down to the strike hitting zero, a large and unwelcome number.
The Safer Way
There is almost never a reason for a beginner to leave a put naked. The fix is simple: set the cash aside and make it a cash-secured put instead.
That single change transforms a nerve-wracking, margin-exposed bet into a calm income trade. You collect the same premium, but now you are genuinely prepared to buy the shares, on a stock you actually wanted to own, at a price you were glad to pay. Same upside, far less danger.
- You have no cash set aside for assignment
- You are leaning on margin
- The stock could drop sharply
- Set the cash aside: a cash-secured put
- Sell only on stocks you want to own
- Collect the same premium, far less danger
- A naked put is a sold put with no cash set aside to buy the shares.
- "Naked" means unbacked: the obligation has nothing behind it.
- A sharp drop can force a margin call and a large loss.
- The safer version is the cash-secured put: same premium, backed by cash.
Pop Quiz
Three quick questions to see what stuck. Pick an answer and the explanation shows up right away.
What makes a put "naked"?
"Naked" means unbacked: you sold the put but did not park the cash to buy the shares if assigned.
What is the danger if the stock falls hard on a naked put?
Assignment forces you to buy at the strike using funds you never parked, which can trigger a margin call at the worst time.
What is the safer version of this trade?
Set the cash aside and it becomes a cash-secured put: same premium, but backed and far safer.
Bottom Line
A naked put is a sold put with no cash behind it. It behaves just like any short put until the stock falls, and then the lack of backing turns a routine assignment into a scramble, complete with margin-call risk and a loss that runs to the strike.
The lesson is simple. If you like the idea of selling puts for income, back the trade with cash and run a cash-secured put instead. Same reward, without the exposed downside.
Keep going: the safe version is the cash-secured put, and the mechanics are the short put.