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11 Secrets of Naked Option Writing

Here's what you need to know before you get naked

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#6 – Write Options That Are at Least 15% Out of the Money

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Top 10 Options Trades for 2011

The only options you should consider as writing candidates are those with no real (intrinsic) value, that are not in the money. Use only those options that are out of the money, which only have time (extrinsic) value.

Furthermore, you should select options that are significantly out of the money, so that it will take a strong move in the stock — a move that normally would not occur in a two- or three-month time period (see Secret #7) — to hit your bailout parameters.

These out-of-the-money options have a low probability of ever being exercised, or of ever having real value, and this low probability is a strong advantage to the naked options writer. In other words, choose to sell options that have the highest probability of expiring before the stock price ever gets close to the strike price.

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