Naked Put unlimited risk?????

Hi All,
I want to start this new thread as there is something on my mind that has been bugging me for a long time and I would like to share it with the forum and hopefully get an answer.

Ok heres the premise, I am a value investor and normally stick to the contrarian calls based on value analysis. I am an investor and tend to hold my buys for a long time/3-5yrs

Currently I am looking at ONGC SAIL OIL and GRASIM all these stocks belong to
Mcap >10000Cr
Ev/ebitda < 10
Interest cover >4
ROCE>25 (trailing FY10) and
dividend yield (3yr avg n 1 yr) above 2% (except grasim -1.2%)

I would like to OWN these stocks, but think that based on the short term news flow/sentiment the stocks may slide even further. I think they are good buys even at current prices, but hey who doesnt like a discount if it can be had???

Now in classical sense of options, my american friends suggest to me that i should write a put option on the stock that i want own at Current Market Price (CMP) (10% lower strike price than CMP- 1 month expiry). Eg if CMP is Rs 100 I sud write a naked put option of strike price Rs 90. case 1 the stock price stay above the strike price Rs 90 I pocket the primium and get the stock at strike price. case 2 the stock price falls below the strike price of Rs 90 say to Rs 80 (20% drop in a month!) and I have to buy the stocks at strike price i.e. Rs 90 (which in theory still sud be a good deal as i was ready to buy them at a much higher price of Rs 100!!). This sounded full proof way for buying stocks at a discount 1 month later considering that I wud like to own at current CMP. whats 1 month to an investor with a 3-5 yrs perspective???

Now all said n done, in the indian scenario, options are settled in cash not in stocks and then there is the talk abt unlimited risk (??) associated with the naked put. Am I missing somethin??? how can the risk be unlimited when in the worse case scenario (of case 2 above) the stock price can only go to 0 ie max loss is (strike price* lot size-premium paid). Say in case of SAIL above 1 lot=1000 strike price say 150 (roughly 10% below CMP). Say i write a put option (1 month) and get a premium of approx Rs 2 ie Rs 2000 in all. Now in the worst case scenario if SAIL goes to 0 my loss 150*1000-2000= Rs 148000

This is very much a definite loss as opposed to unlimited loss!!!!! Rs 1.4l loss at the expense of a max profit of Rs 2k is bad... but the probability of SAIL going to 0 in a month is practically 0!!!! a more likely worse case scenario is Rs 100 (approx 25% loss) ie total loss 50*1000-2000= Rs 48000

Now considering that i was thinkin of owning the stock at Rs 166, if i had done so, one month later I wud have suffered Rs 66/share so if i wud have bot 1000 (ie rs 1.66lakh) shares my loss wud have been Rs 66k!!!

being a newbie in option writing I am not sure if all the things that I wrote above make sense or is there an alternate worse case scenario that I am missing ??? which results in unlimited losses???

Does the basic primise that I want to buy the underlying stock make the difference to the writing naked put case???

Please guide me in my endavour of making value investments more valuable

Regards,
Rishi

If you can afford loss of 148000 for a profit of 2000 then this is the limit.....
I never said that I can afford Rs 1.48 lakh loss for 2k profit. what I was trying to say is that after reading at so many places (even on this forum!) that naked put has unlimited risk... i was tryin to make a point that I dont think its unlimited!!! and if u read the post carefully, the chances of making a 1.48 lakh are as good as 0 as the share price will have to be 0 for that to happen ( even satyam never went to 0!!!)

Of course put writing is not unlimited it is limited to 0... but call writing is definitely unlimited and pratically it is advisable to go for so called UNLIMITED rick call writing instead of LIMITED risk put writing....
rgds
Abhi

Hi

At the moment are many threads all over the forum about the same subject. I am not clear, why every body starts a thread with the same subject. Even you, thread owner, have opened more than one thread about the same subject, and this is stupid. I hope, the moderators delete at least one of this threads.

Even than, here some post about the same subject, which should expand your knowledge about writing options and make you hopefully stooping to may open again an other thread about the same subject. This then really would get on the nerves.

http://www.traderji.com/options/305...g-strategy-option-spreads-116.html#post459952

http://www.traderji.com/options/305...g-strategy-option-spreads-121.html#post478132

DanPickUp

Hi DanPickUp,
There is no thread which expalins the strategy of writing puts to buy a stock whose price is already at a level which is acceptable.

I wanted to know if this is possible in indian market where puts are cash settled and as we dont get stocks at the end of contract, does that expose me to ne more risks?? the Q was less abt naked put writing and more abt using it to buy scrips that are already at a good price at a further discount 1 month down the line.

I am really sorry if my Q irritates u.

Hope some member is kind enuf to ans my querry based on their exp and I hope that newbies like me dont irritate forum member.

really sry for taking u r time DanPickup

in case of SAIL, why dont u write strike 160 put and buy strike 150 put.
seeing nseindia, currently, 160 put is at Rs. 0.6 and 150 put at 0.15. u ll get 0.45 less brokerages. on a lot size of 1000, u ll get around 3 % return (after brokerages) while risking only Rs 10000 at most. this is not a bad return given that expiry is in 4 days, and loss potential is much below ur loss handling capability i.e 148000.

in case of SAIL, why dont u write strike 160 put and buy strike 150 put.
seeing nseindia, currently, 160 put is at Rs. 0.6 and 150 put at 0.15. u ll get 0.45 less brokerages. on a lot size of 1000, u ll get around 3 % return (after brokerages) while risking only Rs 10000 at most. this is not a bad return given that expiry is in 4 days, and loss potential is much below ur loss handling capability i.e 148000.