Trading Rules: Short Naked Options

The subject is much less risqué than the title would suggest. A naked options position is one without at countervailing purchase to limit loss. The “short” means that the naked options are sold to begin with, and then bought at the end, one hopes at a lower price. My newly opened short naked call position on GDX is an example.

Positions: Short Naked Puts or Short Naked Calls

  • Set the strike price somewhere from delta 16 to 30. The higher the delta, the greater the risk and the smaller the odds of success.
  • Select an underlying stock whose Implied Volatility Rank (IVR) is 25% or greater. The higher the IVR, the greater the potential return. (This is similar to the IV Percentile found on many trading platforms.

Entry timing: As close as possible to 45 days prior to expiration, giving preference to monthly options. Generally, I won’t enter after 43 days prior to expiration.

Due diligence before entry:

  • Avoid earnings announcements
  • Avoid ex-dividend days
  • Ensure that the potential loss is within the trader’s guidelines for managing trading funds.

Exit rules:

  • Up to 21 days prior to the options expiration
    • Exit at 50% of maximum potential profit.
    • Exit at 50% of maximum potential loss.
  • If one these conditions occurs — a loss that is twice the credit received, a move beyond the short strike price, or 21 days prior to the options’ expiration — consider taking one of the following actions:
    • If profitable, exit the position
    • If unprofitable, do one of the following,
      • Exit the position.
      • Roll the position to the same strike price a month later, if doing so produces a net credit after the loss on the current condition is subtracted.
      • Buy options that will offset the short options, converting the position into a defined risk trade.

By Tim Bovee, August 6, 2021, Portland, Oregon


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.


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