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If I buy a long put without holding the underlying, does it amount to a naked put? If I hold the underlying and buy a put, is that a covered put? Also if I hold the underlying and sell a put, is that a protective put? I am very confused over these terms.

  • Wouldn't shorting and selling a put balance off each other and then you unwind the short if in the money and then when the put rises same???? – user36443 Jan 10 '16 at 23:16
  • @user36443 what you get is earning premium of selling the put, without the infinite-till-zero downside risk of being naked. because the short shares offset the rising in price of being short the put. It is just an upside down covered call. Less risky than naked put, more risky than covered call due to the infinite upside of the short underlying. – CQM Jan 11 '16 at 1:02
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Naked put This is the same thing as an "uncovered put" You are the writer of the put (seller) and do not have a short position in the stock-- this means that if the buyer of the put uses the option, you would be forced to buy the underlying stock at the exercise price. There is huge downside and limited upside to this. (upside is the premium paid for the put)

Covered Put This is where you are the writer of the put (seller) while shorting the underlying stock. there is still a risk of the underlying stock moving much above the strike price (exercise price)

Protective Put This is more along your example -- if you buy a put and also hold the underlying. This will allow you to minimize downsides.

To your question -- the first two you are asking about deal with writing a put (this is similar to being an insurance originator) Buying a put is similar to buying insurance. Usually you are just out the premium if the underlying stock moves the wrong way.
If you hold the underlying and sell a put -- you're exposing yourself to the same risk -- if the stock decreases in value you would lose on both of them.

  • If i buy a put without holding the underlying, is it a naked put? – Victor123 May 3 '14 at 17:21
  • The would be a 'long put' – Abraham May 3 '14 at 17:22
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    @Victor123 A naked put can only happen when you are the option writer/seller. The buyer of an option isn't ever in a "naked" situation. – Chris W. Rea May 3 '14 at 19:08
  • Thanks. But if I buy a put but at expiry, I don't own the underlying, how can I sell it? It is like trying to sell something that i don't own. Will that be a short sale then? – Victor123 May 3 '14 at 19:42

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