Selling Spreads vs Naked Options

Two strategies for making money as an option seller are to either sell naked options or spreads. Selling spreads are often ntime the much wiser choice for the following reasons.nn1. Lower RisknnYou assume a much lower risk when you sell a spread as opposed to selling a naked option. For example, if you sell a naked call on a stock at say $50 your potential loss is unlimited because there is no limit to how far a stock can move upward.nnOn the other hand if you sold a $50/$55 bear call spread you could still profit if you are right, but your max loss would be limited to the difference between the strike price you sold and the price you bought, in this example $5.nn2. Better For Short TermnnSelling option spreads is a better strategy for making short term profits. You could sell a naked put on a stock. But if it turns against you and you end up having to buy the stock you could be in it for a very long time. nnOn the other hand if you sell a bull put spread and the stock goes against you it is easier to just get out of the trade for a small loss and move onto the next position. nn3. Can Switch the Trade AroundnnThe interesting thing about spreads is that they can be switched around and messed with so that you can profit even if the trade goes against you. For instance if you sell a $45/$40 bull put spread you would make money as long as the stock stays up. nnIf the stock did turn against you, you might be able to still be profitable by simply buying back the $45 put and holding onto the $40 put which would make money as the stock goes down. You can’t do anything fancy like that if you just sell naked options.nnFor more on option spreads visit http://www.stocks-simplified.com/Option_Spreads.html nnFor more on selling naked puts visit http://www.stocks-simplified.com/selling_puts.htmln