Podcast – Episode 203 — Solved: The Biggest Problem With Naked Puts

The Biggest Problem With Naked Puts (And How to Fix It)

If you are an individual investor looking for alternative ways to generate income, selling options—specifically the naked put (or cash-secured put)—is likely on your radar. When executed correctly, it is one of the most powerful tools for generating consistent returns.

The concept is incredibly straightforward: you agree to buy a stock at a specific price (the strike price) by a specific date. In exchange for taking on that obligation, you are paid a cash premium upfront. If the stock stays above your strike price, the option expires worthless, and you keep 100% of the premium.

It sounds like a perfect system for building wealth, right?

Unfortunately, there is a dark side to this strategy that many financial YouTubers and trading gurus gloss over. Today, we are breaking down the biggest problem with naked puts, why popular metrics might be leading you astray, and the conservative, mathematically-backed solution you can use to protect your capital.

The Illusion of the “Easy” Naked Put

Statistically, naked puts are incredibly forgiving. You can set up a trade where the underlying stock can go up, trade sideways, or even go down slightly, and you will still walk away with a profit. For instance, selling an option with a 20 Delta means you have a baseline 80% probability of the trade expiring worthless and keeping your premium.

Because the win rate is naturally high, traders often become complacent. They string together weeks of easy, profitable trades, collecting a few hundred dollars here and there. But then, disaster strikes.

A stock unexpectedly drops 10% or more in a matter of days. Suddenly, the trader is sitting on a massive loss, entirely wiping out weeks or even months of carefully collected premiums.

The Core Issue: Picking the Wrong Stocks

The biggest problem with naked puts is not the mechanics of the strategy itself. The problem is stock selection. When searching for trades, far too many investors fall into the trap of picking the wrong underlying assets for all the wrong reasons. They look for:

• The hottest, trendiest stocks in the news.

• Companies a friend or internet forum mentioned.

• Assets with wildly exaggerated price movements.

When you sell puts on companies without a strict, statistically sound methodology, you are relying purely on hope. If the trade turns against you, a simple one-week income trade can quickly devolve into a multi-month war of rolling options, tying up tens of thousands of dollars in capital just to break even.

This is also the fatal flaw of the highly popular Wheel Strategy. If you get assigned shares of a plunging stock, your capital is trapped in an asset that is moving backward. You can no longer sell lucrative covered calls on it without risking locking in a massive capital loss.

“The biggest problem with naked puts is that people lose money by picking the wrong ones. They pick the wrong stock for the wrong reason. They don’t have any scientific testing behind it, and they just try to play the probabilities, which is not an edge.”

The Danger of Chasing IV Rank

One of the most common pieces of advice given to option sellers is to scan for stocks with a high IV Rank (Implied Volatility Rank). The logic assumes that higher volatility equals higher option premiums, which means a higher return on investment.

However, treating high IV Rank as an automatic “buy” signal is incredibly dangerous. High volatility means a stock is experiencing exaggerated, violent swings up and down. You are being paid a higher premium because you are taking on a substantially higher degree of risk.

There is no free lunch in the markets. Chasing premium just for the sake of a higher yield is a surefire way to catch a falling knife.

The “Threshold” Solution: A Smarter Way to Sell Puts

If chasing volatile, news-driven stocks is a recipe for disaster, and selling puts on boring, slow-moving dividend stocks doesn’t yield enough premium to be worth your time, what is the middle ground?

The solution lies in identifying Threshold Stocks.

A threshold stock is a company that has just crossed a major, round-number price milestone for the very first time in its history (e.g., $100, $200, $500, $1,000). Extensive backtesting across thousands of market occurrences has revealed a fascinating edge:

When a stock crosses a major price threshold for the first time, there is an over 90% probability that the stock will continue to advance another 10%.

There is immense underlying momentum pushing these companies to new historical highs. Whether it’s driven by algorithmic buying, analyst upgrades, or institutional accumulation, the momentum is undeniable.

Combining Probabilities for a Massive Edge

By deploying the naked put strategy exclusively on Threshold Stocks, you are effectively double-stacking your probabilities:

1. The Options Edge: You are selling an out-of-the-money option that inherently carries a high statistical probability of expiring worthless (e.g., 80%+).

2. The Momentum Edge: You are trading an underlying stock that has a 90% probability of trending upward toward a new profit target over the coming months.

Even if the stock dips temporarily—taking days, weeks, or even a few months to hit its final target—the underlying momentum ensures that the asset is highly unlikely to completely fall out of bed. You avoid the trap of being permanently assigned to a dying company, and you can confidently collect premium while the stock marches forward.

Conclusion: Trade With the Odds in Your Favor

Selling naked puts should not be a gamble. It should be a precise, calculated business transaction.

Stop throwing capital at high-IV names or trending stocks without a clear, mathematical reason to do so. By adopting the Threshold Stock concept, you filter out the noise, avoid the dangerous drawdowns, and focus your capital exclusively on assets with the wind firmly at their backs.

Podcast Transcript

All right, passive traders, welcome back. Hope you’re doing well. Today, we’re going to be talking about naked puts, and specifically the biggest problem of naked puts, and a solution that I’ve actually found to the biggest problem.

Now, if you don’t know me, my name is Alan, and I’m the head trader at Option Genius. We will be talking about trading, and so you have to know that trading can cause losses. Don’t trade with money you cannot afford to lose, and everything that we’re going to be talking about today is for educational purposes. So that is my nice disclaimer.

The issue with naked puts as a trade is that I believe it’s a great trade. I think it’s an awesome trade, but there are some issues which most YouTubers and people who are pitching you on this trade kind of gloss over. So let’s go back into the beginning. In this video, I want to show what the problem is, what people have been doing—or at least what I’ve been telling passive traders to do up till now—and then a new solution to the problem that I’ve been testing. It’s been working really well, and I’m going to share with you what that is and how you can do the same.

Basically, a naked put is an option selling strategy. It’s somewhat passive, but it is a contract. When I first got started trading options, the first trade I ever did was a covered call, and I thought this was like the best thing since sliced bread. I thought, I own the stock, and I get free money just by selling a call? Okay, that’s awesome. Actually, the problem with naked puts is similar to this problem with covered calls. I was doing covered calls for a while, then I got into credit spreads, iron condors, butterflies, and more advanced strategies, and I was always told to stay away from the naked put. People say it has unlimited risk, the stock could go down to zero, you get margin calls, and the broker makes it sound like scary stuff. So I never traded them. When I started Option Genius, right on the homepage, it said: “We trade this, this, and this, but we do not trade naked puts.” Some people liked that because they thought the same way.

Fast forward a few years, and I realized naked puts are not that bad. They’re actually pretty cool. Right now, they’re probably one of my favorite strategies. They make a really good return, and they’re pretty simple to understand and implement. It’s a very fast trade to get started with. If a stock is trading at a certain price, you sell a put below that price, and you get paid for that put. If the stock stays above that price, the put expires, and you keep all that money. If the stock goes down to that price, then you have to buy the stock at that price.

Let’s look at QQQ, which is trading at almost $700—let’s say 693. I like QQQ right now. I don’t think it’s going to go down, or if it does, it’ll just go down a little bit. So maybe I’ll sell some naked puts. If it goes down a little bit, I’d like to buy some more shares, or just use this as an income trade and take the money.

I can look at an expiration nine days away. I’m going to say, with QQQ selling at 693 right now, in nine days I don’t think it’s going to get down to 675. Looking at the option chain, that’s about a 20 delta, which means this option has an 80% probability of expiring worthless. So if I sell this, I will make money 80% of the time, keeping the entire amount I collect—which in this case is close to $300. So I make $300 over nine days. Not bad!

If you are doing this in a retirement account or without margin, you need the entire cash amount to buy 100 shares at 675, which is $67,500. Most people aren’t going to tie that up for just $300 in nine days. But if you have a margin account, you only need about half of that, or even less with portfolio margin. The returns get higher when you use margin, you just have to be careful. Naked puts only work in an upward or sideways market. You do not want to try and catch a falling knife in a down market.

So what is the biggest problem with this trade? The problem is that people choose the wrong stocks.

People choose stocks that they probably have no business selling options on in the first place because those stocks are too volatile or there’s something else going on with them. They look at the hottest stocks, stocks in the news, or something a guru online mentioned, and they just jump in. It only takes one bad trade to mess it all up. You could make money week after week, and then six weeks in, the stock falls 10% and wipes away all your gains.

Now you’re sitting on an in-the-money put option with two choices: take a massive loss, or buy the stock. A lot of times, people turn a one-week trade into a multi-year battle just rolling options to avoid a loss. This is the biggest problem with naked puts, covered calls, and the popular “Wheel Strategy.”

Up until now, I told my passive traders to only do naked puts on stocks they want to own long term—like Apple or Walmart. Nice, boring stocks with good balance sheets. The problem? Most people don’t like the return because it’s a much safer trade, so they chase high-flying, volatile stocks with a high “IV Rank” (Implied Volatility Rank) to get more premium. But more volatile just means it’s moving up and down violently. You’re taking on a lot more risk to get that premium. There is no such thing as a free lunch.

How do we sell puts on high-flying stocks without getting crushed? A few months ago, we did a workshop in Club Genius and talked about a particular kind of stock called Threshold Stocks.

These are companies that, for the first time in their history, have passed a major price threshold—like $100, $200, $500, or $1,000. When they cross these levels for the very first time, we know through backtesting that there is an over 90% probability the stock will continue to advance another 10%.

The issue is we don’t know exactly when these stocks will hit that profit target. On average, it takes about six months. But logic dictates that a threshold stock is the perfect candidate to sell naked puts on. It has momentum, volatility, and mathematical backing that it’s heading higher.

Ever since we came up with this concept, I’ve been trading naked puts on these stocks, and it has worked phenomenally well. We have a spreadsheet in the club tracking these names. Some take weeks, some take months, but because the momentum is there, the stock rarely falls out of bed. You can make 3-4% a week on a naked put while waiting for the stock to hit its long-term profit target.

To prove why this matters, let me share a mistake I made earlier this year. I went a different way and did not sell naked puts on a threshold stock. I sold seven put options on Netflix.

I thought, This is a good stock, it’s not going to go down. But it wasn’t a threshold stock. Soon after, they made an announcement, and the stock just dropped, and dropped, and dropped. I bought it around $120, and the stock fell all the way down to $75. I was rolling and rolling until I finally got assigned. Months later, it’s still sitting at $88, and I’m sitting on a loss, unable to even sell good covered calls because the premium is so cheap now.

I’m kicking myself because I didn’t follow my own rule. I could have used that same capital on a threshold stock and avoided fighting this drawn-out battle. When traders pick the wrong stock willy-nilly and get burned, they say, “Oh, options trading doesn’t work!” No, you just picked the wrong stock.

If you have a trading account that you’re trying to build up for cash and alternative income, the threshold method is the best way to go. You get higher premiums, much higher returns, and you have a mathematical edge that prevents you from getting stuck for months in a losing trade.

We don’t need a million trades. We just need to identify the very best ones out there and trade those. If you’re interested in learning more about thresholds, how to find them, and how to gauge the momentum behind them, you can check out our Club Genius program. Reach out to us at OptionGenius.com, and we can tell you more about the workshop and the club.

Thanks for joining me. If you have any questions, you can always reach out, and as always: trade with the odds in your favor. Take care.