Winning with Options: The Smart Way to Manage Portfolio Risk and Maximize Profit

99A Primer on Options Trading

expire worthless. It is that one out of four remaining that

you need to think about before entering into any short

strategy.

■ Uncovered Puts

Calls can be covered or uncovered, but puts cannot be cov-

ered. When you sell puts, they are uncovered (also called

‘‘naked’’). Potential losses are limited because a stock can

only go down so far. For example, a $20 stock can only go

down to zero at the very worst, so the risk is finite. In

comparison, a stock could rise indefinitely, so uncovered

call writing comes with a theoretical unlimited risk.

The realistic maximum loss in an uncovered put is not

as extreme as zero either. The real maximum risk is the

company’s tangible book value per share. For example, if

a $20 stock were to