short put follow up question

Question

Writing naked puts can be somewhat risky therefore it is useful to be long the underlying stock the appropriate number of shares. Assuming one is in this scenario I have two questions:

1): If the put gets exercised can you use the underlying long shares to offset?

2): Would being long CFDs count as being long the underlying stock that the put option is for, since with CFDs you don't technically own the stock?

Thanks.

Bob Baerker · Answer

Your understanding of this is incorrect.  A put has a negative delta.  Selling a put means that you are long delta - you are going to BUY shares if assigned.  Long stock has a positive delta so there is no hedge here.  So no, If the put gets exercised you CANNOT  use the underlying long shares to offset.  They are additive not offsetting.

All directional positions are somewhat risky but technically, writing a naked put has less risk than owning the stock because short  put acquired stock will always have a  lower cost basis than just buying the stock because you receive a premium for selling the put. The problem is the asymmetric R/R ratio of the short put (small profit potential while bearing all of the downside risk).

short put follow up question

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