What is a naked put?
In one line: A naked put is a put option you sell without setting aside the full cash to buy 100 shares, using margin instead of cash as the backing.
How it works
A naked put is the same promise as a Cash-secured put: you sell a Put option and agree to buy 100 shares at the strike if assigned. The difference is what sits behind the promise.
With a cash-secured put, the full cost of the shares is in your account. With a naked put, your broker only holds back a slice of it as margin, often around 20% of the stock price plus the premium, less the amount the put is out of the money. The exact formula differs by broker.
That smaller hold is the appeal. It's also the trap. The risk of the trade hasn't shrunk. Only the deposit has. If you're assigned, you still owe the full price of 100 shares, and the broker will lend you the rest or sell things to cover it.
Sellers in the wheel strategy usually stay cash-secured for that reason.
An example (hypothetical)
XYZ trades at $50. You sell one 30-day $45 put for $1.00 and collect $100. Using that rough formula, your broker holds back about $600 of buying power ($1,000 + $100 − $500) instead of $4,500 (an illustration, not a trade idea).
Then XYZ reports bad news and gaps to $28. The put is assigned.
| XYZ at expiry | What happens | Shares | Premium | Total |
|---|---|---|---|---|
| $50 | Put expires | — | +$100 | +$100 |
| $44 | Assigned at $45 | −$100 | +$100 | $0 |
| $28 | Assigned at $45; you owe $4,500 for shares worth $2,800 | −$1,700 | +$100 | −$1,600 |
| $20 | Assigned at $45 | −$2,500 | +$100 | −$2,400 |
At $28, the loss is $1,600, more than twice the $600 hold. And you now owe the full $4,500 for the shares. If the cash isn't there, it lends it to you at interest or issues a margin call and sells positions. The same move on a cash-secured put would have cost the same $1,600, but the shares would already be paid for and nothing would be forced.
A math example, not a promise.
Why it matters for sellers
The buying power you don't tie up looks like free room. Sellers fill that room with more puts. Five naked puts on a $600 hold each feel like a $3,000 trade. In a market drop they're a $22,500 share purchase, all at once, on borrowed money.
The premium is the same either way. The only thing margin adds is size you may not be able to carry. Before selling any put, ask: if every contract is assigned tomorrow, can I pay for the shares? If no, it's too big.
Naked puts need a margin account and a higher options approval level. Many brokers won't allow them in a TFSA, RRSP or IRA at all, so check yours.
Questions
What's the difference between a naked put and a cash-secured put?
Same contract, same promise. A cash-secured put has the full share cost set aside. A naked put is backed by margin, usually a fraction of that, so assignment can cost more than you have on hand.
Can you lose more than your margin on a naked put?
Yes. The loss is set by the strike and the stock, not by the margin held. If the stock falls far below the strike, the loss can be several times the buying power the put used.
Do beginners sell naked puts?
Most can't: brokers require a margin account and a higher approval level. Most shouldn't, either, until they've handled assignment on a cash-secured put and know how it feels.
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