When we write a naked put we are effectively 'promising' to buy someone else's shares in future should stock price fall below a certain level.

For doing this we are instantly paid spendable cash for each share that we 'promise' to buy. If stock does not fall below this level (the strike price), then we simply keep cash without having to buy stock.

TIP:

Just like covered calls, only write naked puts on stocks that you would be happy to own and if you want to be more conservative, only sell contract equivalent of amount of shares you wish to buy, should stock fall below strike price.

As each option contract represents 100 shares of underlying stock, you can work out how many contracts you can afford to write simply by dividing amount of capital you want to invest in that trade by strike price of option you want to sell and then divide that number by 100.

Here's formula:

Capital/Strike Price/100 = Number of Contracts

So if you have 20,000 to invest in one trade and let's say that strike price of option is $10, then you can safely write 20 contracts.

By 'safely' I mean that you can afford to buy stock should you be assigned.

Another thing to remember is that should you be assigned, you would effectively be buying your shares at a discount.

You've got to be patient enough to wait for entries that have two things: first - a high probability of immediate gain, and second - a small potential for loss if worst happens and your hard stop gets hit. This principle applies to all entries, and it's useful to think about it when you're trying to decide whether to enter on a pullback or a continuation of a move.

Entering on a pullback offers less dollar risk than chasing market because you can place your hard stop on other side of support or resistance and risk only a point or two. (Of course, this doesn't mean you're going to hang around and let market hit your hard stop if things go wrong.)

Entering on a pullback also gives you a better chance of gaining a point or so in first 30 to 60 seconds of trade. This is important, though very few people seem to be talking about it. perhaps it's a well kept secret.