Naked Option

Warning. You’re going to be disappointed in this video. It’s not nearly as hot as you probably hoped.

Naked options are just options that you sell without having enough of the underlying security to cover your, uh...butt if the price changes. They are an investment that stands on their own, but with extreme amounts of risk.

You invest $10,000 in Coca-Cola stock at $40, buying 250 shares. The stock goes up $2 in a year, and you’ve made a whopping 5% on your money, or about $500. You bought the stock, not the option.

But let's say you had bought $10,000 worth of naked Coca-Cola call options, with a strike price of $42.50, expiring in 4 months. The stock remains at $42.50. Well, guess what. You’ve lost all of your money.

Had the stock gone to $45, however, that $10,000 invested in those call options, which bought you exposure to some 20,000 shares, would have made you something like $2.50 a share of in the money value on those options...times 20,000 shares, or 50 grand. Yeah. Way more than your boring experience of just owning the stock.

In reality, professional investors rarely just buy naked options alone, because they are so risky and volatile. But every now and then, somebody bets the ranch on 22 black. It comes up. They make 36x their money in a very short period of time. And everyone asks them for the best way to angle their thumb when they’re trying to flip a “head” on a quarter…