How to Use a Naked Put in Binary Options Trading

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How to Use a Naked Put in Binary Options Trading

Posted on by John Thiel

The classic Naked Put definition refers to a scenario when a writer owning a put option does not have a short position in the stock on which he’s written the put. This situation is also known as an “uncovered put”, and the level of risk is very high because the profit is limited to the premium received at the time the option is sold.

I have seen a lot of novice traders lose a lot of money because they do not know how to manage risk properly. I have two friends who trade binary options on a regular basis and I advised both of them not to engage in any form of financial betting because they are not technical enough and would probably be termed as “emotional traders” motivated by a gut feeling and not methodical in their financial analysis.

Now let me explain exactly why naked puts are so risky. Now imagine a situation where the writer can lose the whole investment if the underlying asset moves against the projected direction. On the other hand, high risks go hand in hand with high rewards and the profits are extremely big if the underlying asset moves in the direction originally predicted by the trader.

Now lets say that you are a savvy trader and believe that Greece will not be a part of the EuroZone for much longer and this will create a general recession because Greek national debt will spiral out of control and ignite a general recession where people will cash out all their money from the bank and the whole market will crash. If you are trading currencies you might as well have a short position on the Euro regardless because its plain to see that the greenback is very resilient these days.

To summarize, as is the case in all trading and investment portfolios.  It is plainly irresponsible not to do the research and get updated on the news and financial analysis every day. Personally I trade a lot of commodities these days, but also check out the indices, currencies, and my stock portfolio. For example if there is an upward trend in Brent Crude you would need to know why this is happening and who the major market movers are in each category. I highly recommend you look at the binary options strategies post I have drafted as it is a good tool to get you started in binary options online trading.

If you think you are savvy enough and would like to start trading simply click here to open an account at a recommended binary options broker.

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